RSM Australia

Making sense of eligible Research and Development tax incentives

If you’re one of those companies that, unbeknown to itself conducts research and development (R&D) which could qualify for tax incentives – to the tune of 45 cents for every dollar spent – now’s the time to explore how much tax money you might be leaving on the table.

There are countless SMEs across Australia that periodically end up performing 'innovative and incremental' development, which subject to certain criteria is eligible for R&D tax dollars they’re simply not claiming.

Research and development tax incentive example

As an example for the 30 June 2016 tax year, $100,000 spent on eligible R&D activities, a company with less than $20 million turnover would receive an additional $15,000 in the form of reduced tax payable, or up to $45,000 back as a refund from the Australian Tax office if there are sufficient tax losses available (note for the 30 June 2017 tax year onwards, the refundable R&D rate is reduced to 43.5%).

Smaller accounting businesses may not be aware of these R&D tax incentives, and given that they can’t be claimed after the annual 30 April lodgement deadline date, they become a lost opportunity.

How has research and development tax incentives changed?

R&D tax incentives have changed a lot since being introduced in the 1980s, and there’s considerable scope for companies unaware of programmes currently in place. While companies across all industries are letting R&D tax incentives go unclaimed, those involved in software developments, engineering, chemistry, agriculture, pharmaceuticals, clean technology, renewable energy, and mineral science developments are amongst those sectors most at risk of missing out.

When we speak to engineers about the tax incentives they can and can't claim, they very often don't realise what they're doing is actually eligible R&D. It's the same within software developers, chemists and pharmaceutical companies that often don't realise they're able to extract an R&D tax claim from their work.

What SMEs would clearly benefit from is ongoing education on -
A) the type of work that constitutes eligible R&D and
B) the sort of documentation that accompanies the paperwork needed to lodge a claim.


What is eligible R&D?

While by no means limited to the following, some eligible R&D activities include:

Experimental activities where outcome(s) cannot be known in advance, that can only be determined by applying a systematic progression of work based on principles of established science, for the purpose of acquiring new knowledge, plus ‘supporting’ activities.


Similarly, the following are good indicators that eligible R&D is likely to be taking place and this can occur across all industries/sectors:

  • New or improved product development and associated testing.
  • New or improved technical processes and associated testing.
  • New software/product releases (plus new or improved functionality).
  • IT projects requiring a large amount of unique customisation e.g. bespoke  modules.
  • Unforeseen technical problems not easily solved.
  • Projects that failed or required significant re-design.
  • New initiatives to address sustainability issues or improved safety processes.

Seek help early

Given that it's often a fine line deciphering where eligible R&D starts and finishes, and determining the right levels of documentation, SMEs unsure of these requirements should seek professional guidance.

Where professional guidance can really make a difference is helping companies adopt innovative R&D approaches, reducing the cost of R&D tax compliance by improving the level of client education, while encouraging a more active role in claims preparation and better management of R&D investments.

Every time companies conduct work that they believe could be eligible for R&D tax incentives, they need to document the scientific methodology and testing hypothesis they've applied, report the results and discuss the observations.


Explore the possibilities

In the lead up to the 30 April cut off point for R&D tax claims to be lodged - for companies with a 30 June tax year – SMEs should explore their potential R&D tax eligibility, or at very least be well prepared to lodge a claim before 30 April 2017 (for the 30 June 2016 tax year).

It can take weeks to prepare an R&D tax claim, so don’t leave it too late, and remember every year you’re required to repeat the exercise all over again.

Even if companies don’t have sufficient eligible R&D to justify lodging a claim, it could still be worth undergoing a cost-benefit analysis to find out.

Given it’s potential for reducing operating costs and increasing margins, there’s sufficient incentive for companies to conduct eligible R&D, or at very least explore the opportunities before jumping to false conclusions.

The key to implementing an R&D process within the culture of the business comes down to installing meticulous documentation of what you’re doing.

Need some guidance with Research and Development Tax incentives? Get in touch with your local RSM Tax expert for more information, or to learn more about the services offered by RSM here.

Authors

Steve Elias
Senior Manager