Key Takeaways:
- Businesses can claim up to a 45% tax offset for expenses related to developing new knowledge, such as creating new products or processes.
- To qualify, businesses must be Australian-based with revenue under $20 million and engage in core or supporting R&D activities.
- Keep thorough records, claim all eligible expenses, and stay updated on ATO guidelines to maximise your R&D tax benefit.
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 for this tax incentive.
What is the R&D tax incentive?
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 new or different web process for your customers, 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—for instance, to improve the product selection or checkout process on your e-commerce site.
How does the R&D tax offset 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 eligible?
To qualify, 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 , so we recommend talking to your accountant if you think it may apply).
It's important to mention that before claiming the offset, you need to register your activities with AusIndustry, and do so within 10 months of the end of your income year.
Benefits of the R&D tax offset
The most obvious benefit of the R&D tax offset—or any tax incentive, for that matter—is that it puts money back in your pocket. But what doors can that open for your business?
It encourages innovation
The R&D incentive frees up resources that business owners can then invest in experimental research and technological advancements.
Companies that aren't as financially constrained are more likely to explore uncharted territory within their industry, develop innovative products or services, or refine existing processes—all of which could help advance not only their business, but the market as a whole.
It helps with business growth
Spending less on innovation leaves businesses with more financial flexibility to invest in growth initiatives—think increasing marketing efforts, enhancing customer retention, entering new markets, or hiring new talent.
Business owners can focus on scaling up and strengthening their competitive edge with a reduced financial risk, which can be particularly helpful for start-ups and new businesses.
It helps improve efficiency
Investing in R&D often leads to new and improved processes being created, which in turn helps to improve productivity and efficiency, and leads to reduced costs over time. Win, win, win.
What R&D activities qualify for the tax credit?
Eligible R&D activities are broken into two categories:
Core R&D activities
These are experimental activities where the goal is to generate new knowledge, and in which the outcome:
- Can't be predicted or determined in advance using current knowledge, information, or experience
- Can only be ascertained by following a structured process based on established scientific principles, which goes from hypothesis to experimentation, observation, analysis, and ultimately logical conclusions.
Certain activities that are excluded from being qualified as core R&D activities include [1]:
- Market research, testing or development, or sales promotion
- Management studies or efficiency surveys
- Research in social sciences, arts, or humanities
- Mineral exploration
- Activities associated with complying with statutory requirements
- Developing, modifying, or customising computer software.
Supporting R&D activities
These 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's R&D project of creating a new system or process.
What is ‘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.
In short, if you have to work it out from scratch, the R&D tax offset might apply.
How to maximise your R&D tax incentive
Firstly, you need to make sure that you understand what does and doesn't qualify as R&D—and from there, confirm your eligibility for the offset.
If you do qualify, there are a few things you can do to plan for maximum benefit:
- Keep track of all R&D documentation. We're talking everything from project details to challenges, results (even if they're not what you were anticipating), and of course, all eligible R&D expenses.
- Claim all eligible expenses. This can include salaries of employees involved in R&D, materials used in innovation projects, R&D subcontractor payments, and software used in R&D.
- Be prepared for audits. AusIndustry and the Australian Taxation Office (ATO) may conduct audits to confirm your R&D activities meet the eligibility criteria. Be ready by maintaining thorough and updated documentation, familiarising yourself with the potential audit process, and if necessary, working with R&D tax experts.
- Keep up with ATO guidelines. The R&D offset (and tax laws in general) can change over time, so it's important to stay informed. Regularly checking the ATO website is an easy, convenient way of staying in the loop.
Next steps
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 research and development tax incentive 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.
EOFY and tax season can be a great time to level your business. If you want to do so without draining your cash flow, Valiant offers a wide range of asset financing solutions to suit your needs. Receive free, tailored quotes in less than two minutes.
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