In Australia, there are two main types of government funds available for technology or product advancement. These funding mechanisms are either administrated through a grant-based system or through tax breaks, such as the Research and Development (R&D) Tax Incentive. However, where support for R&D is called for, an important question remains: should reliance by companies be placed on cash support (grants), or on the tax system as a mechanism to deliver cash flow?
Firstly, there are a number of different grants available related to innovation, each with their own philosophy and measures. Nonetheless, the nature of grants is highly competitive. Applicants who wish to apply for grant funding will need to go through a competitive merit application process. It is awarded on a discretionary basis by a committee, typically appointed by the Innovation Australia board.
In contrast, the R&D Tax Incentive works differently in that it is not competitive. Rather, if your company is eligible, then it qualifies. The R&D Tax Incentive offers a 40c to 45c tax offset for eligible activities and provides businesses with more predictable support. Thus, an often overlooked fact is that the R&D tax breaks provided by the Government are delivered on a purely market-driven basis. This means that firms are in control of the projects and the directions they head in, and as long as they still meet the definition of R&D, companies can still claim each year. On the other hand, if companies have lined up resources to commence a project when the Government Grant money comes in, companies must follow the terms of the Grant Agreement for the duration of the project. In effect, this can make it difficult to adjust to changing market forces and project needs.
Customarily, grants can be directed to specific projects that the government/innovation agencies consider having high social returns and are more dependent on discretionary decisions by governments. Whereas, a tax-based subsidy seems the market-oriented response as it leaves the choice of how to conduct and pursue R&D programs in the hands of the private sector. The main argument for relying on the tax system is that tax relief tends to be delivered on a less discretionary basis, compared with grants, once the qualifying criteria are decided. As it currently stands, Australia has a competitive R&D tax incentive program on a global scale and has one of the best refundable R&D tax offsets and cash back schemes internationally.
Furthermore, empirical research has revealed that the positive relationship between cash flow and R&D expenditure means enhancement in firm’s cash flow can increase their R&D expenditure. In fact, according to Rafferty and Fund (2005) , cash flow concerns the ability, and willingness, of companies to engage in innovative activities (such as R&D). Moreover, based on their empirical studies they discovered an increase in cash flow stimulates R&D.
Therefore, due to a growing market need for quicker access to cash flow, Swanson Reed has just introduced a new R&D tax refund financing service to our clients. With an R&D Tax Offset Financing service, companies undertaking R&D projects are able to receive the benefits of the AusIndustry R&D cash rebates prior to receipt from the Government. Fundamentally, this means that companies can access their R&D Rebates early, allowing businesses to fast-track their access to cash flow and further support their R&D Activities. See our service page for more information on this funding.
Ultimately, when it comes to funding for R&D, it is up to the company to access which option is best suited to their company and situation. However, if a company does decide that a grant approach is best, in certain cases a company can claim both a grant and a tax incentive on the same project. This is because of a tax provision called the Clawback Adjustment. Essentially, this is a formula that you apply when submitting your R&D Tax Claim to take into account any grants that you have received. If you would like to discuss the R&D Tax Incentive further, please feel free to contact one of our offices.