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Mature Companies vs Start-ups: R&D Tax Incentive Benefits

In today’s modern society, businesses are moving at an accelerated pace and bigger companies are facing threats from smaller, digital competitors. At present, few companies can escape the all-pervasive impact of digital disruption as it streamlines business relationships, overhauls logistics processes and revolutionises markets across every sector. Yet, when an organisation matures to a medium or large concern, it can lose some of the innovative drive which brought its success, and thereafter begins to fade. Innovation, by its very nature, involves taking risks and older corporations become increasingly risk averse over their life spans.

There is no denying that Australia’s timeworn corporate companies are a significant part of our economy.  Digital innovation has accelerated furiously over the past couple of decades, prompting the question – what does this mean for the established, mature Australian company?

Ultimately, to stay competitive and relevant in the digital revolution, mature companies need to be able re-invent themselves and embrace creative destruction. One way of doing this is by investing in research and development (R&D) to facilitate new inventions and methods. Fortunately, the government offers a targeted, broad research and development tax incentive to aid companies who are creating or developing a new product, process or system.

As mentioned previously, the R&D tax incentive falls into two broad categories:

• Companies with an annual turnover of less than $20 million receive a refundable tax offset of 43.5 per cent.
• Companies with an annual turnover of $20 million or more receive a tax offset of 38.5 per cent.

As is the case for many mature companies, they are not a start-up going in to tax loss; therefore, mature companies will typically only get the net benefit out of the programme. If the mature company has an annual turnover over $20 million, then the net benefit of the R&D tax offset they will receive is 10 per cent. This reduces the tax payable and, unlike the refundable tax offset for start-ups, is not a cash rebate. Therefore, a mature company will generally be in a profit-making position before they even make a claim. When compared to the refundable tax offset available to smaller companies, this could indeed be seen a downside from the point of view of a mature claimant company generating over $20 million annual turnover.

However, if a mature company is generating under $20 million in annual turnover, then in some cases they may have accrued tax losses. If a mature company is in that position, then there is a chance they can get the 43.5 per cent refundable tax offset. Essentially, this option is a great driver for companies to make claims and reinvent themselves. Nonetheless, if in this situation the company is still in a profitable situation, the net benefit is 15 cents. This initially offsets the tax payable before they get any cash benefit (being after the taxes is paid). Consequently, the driver there isn’t as strong for the mature companies compared to start-ups who can typically claim 43.5 cents to the dollar.

On the other hand, the alternative option for mature companies is to start an entirely new entity. In this case, the company wouldn’t cross charge wages from their existing entity across – as all this would do is increase profit on one, to then claim a loss on the other. Hence, the company would need to start a completely separate R&D entity with new staff and invest money into it like a start-up. Once this has been done, then they may be eligible for the 43.5 cent cash benefit.

Nonetheless, whichever option a mature company decides to take will fundamentally involve an investment in R&D and a commitment to innovation. It is a strategic decision that ultimately falls in the hands of a company. However, should you have any further questions regarding the R&D tax incentive and what options are available to you, please contact  one our R&D tax specialists. Swanson Reed has  a broad range of experience assisting a vast range of industries and company sizes, should you need any advice on the steps to take, please don’t hesitate to contact one of our offices today.