RSM Australia

Should your SME start making R&D tax claims? | R&D Tax Incentive

In light of the disproportionate number of small and medium-sized enterprises (SMEs) lodging annual R&D Tax Incentive claims, there’s never been a better time for non-participating SMEs to consider their options, urges Dr Richard Wraith R&D Tax Principal with RSM Australia.

While the majority of companies to apply annually for the R&D Tax Incentive tend to be within a handful of sectors, typically services (50%), manufacturing (32%) and mining (9%), SMEs alone accounted for the lion’s share of a total 13,700-plus registrations in 2013-14.

Claiming the R&D Tax Incentive

The fact that 83 percent of the registered $18 billion-plus R&D expenditure for 2013-14 was from companies with an aggregated turnover of less than $20 million should encourage non-participating SMEs to review their R&D tax considerations.

Similarly, the insight that almost half (42.4%) of these total registrations were from companies with turnover under $500,000 – with another 40 percent coming from companies with turnover between $500,000 and $5 million – dispels the misnomer that R&D tax claims are predominantly the domain of big business.

Interestingly, around a quarter of applications annually are coming from new registrants - 3,300 in 2013-14 – and around 90 percent of these are also SMEs with turnover of $20 million or less.

Given that SMEs tend to face greater constraints to undertaking more R&D, the predominance of SMEs among those firms applying for R&D tax incentives is extremely encouraging. It also serves as a wake-up call for those SMEs that could potentially be missing out.

Meantime, interest from larger firms appears to be waning, with R&D expenditure registered by companies with turnover exceeding $20 million having recently fallen by around 15 percent.

While 2015 also proved to be another record year for companies registering for the R&D Tax Incentive - with the total number of registrants up around 10 percent - the number of companies registering for the program was also up by a corresponding amount at the end of March 2017.


How the R&D tax incentive works

For those SMEs that remain unaware, the R&D Tax Incentive comprises a 43.5 percent refundable tax offset for eligible entities with a grouped turnover of less than $20 million annually; and a non-refundable 38.5 percent tax offset for all other eligible entities.

Unused non-refundable offset amounts may be able to be carried forward to future income years.   

The R&D Tax Incentive was designed to make conducting R&D activities a more attractive business investment. For example in FY17, for profitable companies with a tax liability in excess of the tax offset, the incentive provides 8.5 cents in the dollar benefit to a large company and 16 cents in the dollar benefit to an SME with under $10M turnover. For companies between $10M and $20M turnover the benefit is 13.5 cents in the dollar.

These figures represent the difference between the benefit rate of the program and what could have otherwise been claimed as a deduction at the headline company tax rate.

For a large company in tax loss, the benefit is a carry-forward tax offset of 8.5 cents in the dollar. However, for an SME in tax loss, the benefit is an immediate cash payment of 43.5 cents in the dollar rather than having to carry-forward the tax offset.


Additional guidance now available

The Department of Industry, Innovation and Science recently developed new guidance initiatives.

To help companies and tax advisors correctly identify and register activities for the R&D Tax Incentive, four new Specific Issues Guidance documents are now available for those sectors that collectively comprise the vast majority of applications, these include:

  • Getting software development R&D Tax Incentive claims right
  • Getting building and construction R&D Tax Incentive claims right
  • Getting mining R&D Tax Incentive claims right
  • Getting farming R&D Tax Incentive claims right

Included within this new guidance are anonymised findings - made by Innovation and Science Australia and the Department - on real companies conducting real activities. Included within what’s called its Applying the Law series, Business Australia provides useful examples of how the department [of Industry, Innovation and Science] has and will apply the law in various situations.

Specific guidance material is also available for other sectors, including agrifood, biotechnology, build environment, energy, and manufacturing.

As part of a broad refresh of web content in the Industry, Innovation and Science portfolio, information on the Review of the R&D Tax Incentive, including submissions to the Review, has been moved to the R&D Tax Incentive page on industry.gov.au.


Seek guidance early

While specific guidance material is a useful starting point, insufficient clarity and consistency - highlighted within numerous submissions to a recent government-commissioned Review of the R&D Tax Incentive – means SMEs should seek professional guidance early on either undertaking new projects and/or scaling up their current R&D projects.

Highlighting the need for professional guidance was the R&D crackdown flagged by the Australian Tax Office (ATO) back in February. The ATO noted that routine software development will not be considered eligible for support under the R&D Tax Incentive. While the ATO’s stance hasn’t necessarily changed, the inference behind their recent missive serves to remind SMEs to be intimately aware of what types of R&D is entitled to tax incentives and what isn’t.

Given that this stance could be disastrous for start-ups, lack of clarity and consistency is creating angst for a lot of young Australian tech companies. Assuming this stance signals less support from government, start-ups should also consider seeking professional advice on issues like capitalisation, and what implications this stance could have on day-to-day operations.


R&D tax registrations by state (2013-14)

State

Share of registrations

Industry

Share of registrations

NSW

35.0%

Services

49.8%

VIC

26.1%

Manufacturing

31.9%

QLD

17.6%

Mining

8.8%

WA

13.2%

Construction

3.2%

SA

5.6%

Utilities

2.6%

Tas

1.2%

 

ACT

1.1%

 

NT

0.3%

 

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