How Start-ups Can Benefit From the Overlooked R&D Tax Incentive

March 2nd, 2016

money-case-163495_960_720From finding a $20 note in your back pocket to discovering a gold mine of spare change lurking in the cushions of your sofa, undeniably, the act of finding money is exhilarating. Your mind wanders as you begin to envision the endless possibilities available to you and your new found money. However, in the back your mind, a lingering voice pries, “are there other saving opportunities I may be missing out on?’

As a start-up you may be disregarding savings much more lucrative than an extra $20 in your bank account.  It goes by the name of the Research and Development (R&D) tax incentive and this tax benefit can lead to serious savings on firm’s investments.

Today, innovation and disruption are the most powerful drivers of multi-factor productivity growth – and this is ultimately what Australia will depend upon for future prosperity. However, in recent decades we seem to have fallen behind in the global innovation stakes. According to the newly launched National Innovation and Science Agenda, only nine per cent of Australian small to medium-sized businesses brought a new idea to market in 2011-13 compared to 19 per cent in the top five OECD countries.

Nonetheless, given the right circumstances, small businesses can scale. One available scheme to help companies grow is the Research and Development (R&D) Tax Incentive. In essence, any firm developing or improving products, processes, or software, may be eligible. However, as at June 2014, fewer than 12,000 performing entities had registered for its benefits. This is particularly so as the R&D tax incentive is a frequently missed opportunity for small and medium sized companies (SME) and start-ups, with many erroneously believing they are not eligible.

Despite the fact that the R&D claim process can seem quite convoluted, the benefits of doing it properly are well worth the effort. In particular cases, it offers a 43.5 percent refundable tax offset for R&D expenses in the form of annual cash rebates to companies that have less than $20 million in revenue and file tax returns in Australia. Thus, for a small company involved in research, the tax benefit is a welcomed non-dilutive source of funding for R&D activities.

In general, the 43.5% refundable offset is an often overlooked, yet worthwhile, option available for smaller companies and start-ups. Ultimately, a cash back benefit can provide a financial injection to help start-ups that are often cash-strapped.  For example, a start-up company that is in a loss position for tax purposes who spends $1 million on R&D will receive a $435,000 cash refund under this incentive.

Certainly, the R&D credit is available for SMES – but companies do need to take the initiative to apply to get it, the government isn’t merely offering out benefits. If you think your SME may be eligible, have a discussion with one of our R&D tax specialists who will be able to answer any further questions or help you make your claim.