Part 1: Are You Eligible For The R&D Tax Incentive?

Nathalie Jones

Monday, 27 June 2016

Want to understand how you can tap into the 45% tax offset from R&D activities? If you haven’t come across the term R&D before, it stands for Research and Development. This quick guide will help you through the process of understanding what it is and whether you’re eligible.

The way that the incentive is written means that if you are building a product that involves the development of “new knowledge”, you may be eligible to receive up to 45 cents back on every dollar spent developing this knowledge.

For example,  if you hire a website developer to build a web process for your customers that is new or different, and you pay that person $10,000, you could receive up to $4,500 back from the government for R&D. This could be a cost-effective way to develop new features - perhaps you want to improve the product selection or checkout process on your e-commerce site. Great, right?

Ok, so how does the R&D tax offset actually work?

If you’re an eligible company earning less than $20 million in revenue per annum, you can claim up to a 45% refundable tax offset on any expense items that go into creating new knowledge.

Am I an eligible company?

To be an eligible company, you need to be:

  • An Australian company; OR
  • A foreign company but an Australian resident for tax purposes; OR
  • A foreign company of a country with a double-tax agreement with Australia (this one can get complex — talk to your accountant if you think it may apply).

What R&D activities qualify for the tax credit?

R&D activities are broken into two categories:

  1. Core R&D activities; and
  2. Supporting R&D activities

If your business activities fall into either of these categories, you’re eligible for the offset.

Core R&D activities are activities:

  • In which you have a problem and the only way to find the solution is through experimenting with a new system or process (deliberately broad); OR
  • Which are undertaken for the purpose of creating ‘new knowledge’ (also deliberately broad).

Supporting activities are activities commenced with the aim of enabling core R&D activities. For example, you may need to buy a piece of software to help your web developer build a new process on your website. This would classify as a supporting activity as it enables your business to create a new system or process.

But what about 'new knowledge'?

‘New knowledge’ is a very broad term. You probably don’t call your day-to-day business activities ‘knowledge creation’, so when it comes to applying for the R&D grant, you’ll want to think about how you frame what you do.

The definition of ‘new knowledge’ includes “improving materials, products, devices, processes or services”. This could be as simple as investing the time to create a new ordering system for your online business or making your manufacturing process more efficient.

The knowledge doesn’t even have to be totally “new”. For example, if your competitor already has what you’re looking for, it might still be considered ‘new knowledge’ for you because they aren’t going to share their systems and processes with you. If you have to work it out from scratch, the R&D tax offset might apply.

What happens now?

If you think you can make any improvements to your business that would enable the R&D offset, be sure to have a chat to your accountant. Most accountants will know how the R&D offset works, and will be able to give you advice on what activities will trigger the offset for your business and how much you might save.

Keep an eye out for Part 2 in which we discuss what to do once you know you’re eligible.

Nathalie is the Communications Manager at Valiant Finance. She has a double degree in Journalism and Law, and a background in the fintech space, hailing from Asia's largest fintech hub, Stone & Chalk.

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