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The Importance of Risk When Claiming the R&D Tax Incentive

Undeniably, organisations’ innovation activities tend to have higher risk profiles than other pursuits and require different methods for measuring value. The constant need for innovation, change and renewal are business imperatives that cannot be ignored or avoided by any organisation for any sustained period. In fact, the risks associated with an organisation not making changes to products, internal processes or business models over time are equally significant, leading to extinction and irrelevance if unchecked.

However, it is an often overlooked fact that the expenditure incurred in creating innovative products, services or systems is potentially available for a tax rebate of up to 43.5 per cent, which can greatly assist in making the risk worth the effort. To elaborate, the Australian Government offers a research and development (R&D) tax incentive which assists in offsetting the costs of  R&D and improving a company’s cash flow. The R&D tax incentive came into effect on 1^st July 2011 and encourages companies to engage in R&D by providing a tax offset for eligible R&D activities. The program is administered jointly by AusIndustry (on behalf of Innovation Australia) and the ATO. For eligible entities with a turnover of less than $20 million p.a. the R&D tax incentive is a 43.5% refundable tax offset (equivalent to a 150% tax reduction).

Ultimately, familiarity with the requirements of eligible R&D activities is imperative when seeking to maximise the benefit from the R&D tax incentive scheme. The broad eligibility criterion is there to allow any company in any industry sector in Australia to make a claim.

Fundamentally, to make a claim for the R&D tax offset an Australian R&D entity will be required to show ownership of the R&D results, demonstrate financial risk in respect of the R&D expenditure and be undertaking eligible core or supporting R&D activities. In respect to this, core activities are experimental activities whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work. There is also a list of non-core R&D activities which do not qualify for the scheme, which involve typically little risk.

Significantly, the word ‘experimental’ is vital when determining eligibility. A company must be taking financial risk that is associated with technical or scientific risk to be eligible. This can cover activities within the food industry, manufacturing or disruptive technology. However, regardless of industry, it must be an advancement on a technical or scientific level to qualify.

Therefore, the key point in this regard is that there must be a risk involved. If a company knows within their expertise that they will get a certain outcome without taking any financial risk, than the activities are not eligible. Hence, a company must have a technical or scientific risk associated with a financial risk where there is potential for failure. This ultimately gives rise to eligibility.

Nonetheless, there are other elements that determine eligibility when claiming the R&D tax incentive. If you would like further information, see our: Is your Company Eligible for the R&D Tax Incentive? And A Snapshot of the R&D Tax Incentive blog posts.