As a business owner, navigating the financial landscape and understanding the available grants and incentives can sometimes seem like steering through uncharted waters. A lack of knowledge about the potential financing options is a common hurdle that many encounter. However, one well established program that is often overlooked is the research and development tax incentive. The scheme, also known as the r&d tax incentive or the R&DTI, is non-competitive meaning you just have to meet the criteria to be eligible to apply. So let’s take a look at the r&d tax incentive and answer some of the key questions.

What is the R&D Tax Incentive?

The R&D Tax Incentive is a flagship Federal Government program designed to boost competitiveness, innovation and drive economic productivity and encourage Australian companies to invest in research and development activities. The key aims are:

  • encouraging industry to conduct R&D that may not otherwise have been conducted
  • improving the incentive for smaller firms to undertake R&D
  • providing business with more predictable, less complex support.

This tax incentive is not industry-specific, meaning that businesses from a wide range of sectors can leverage this benefit. It offsets some of the costs of research and development activities and aims to reduce some of the financial risks associated with undertaking this activity. This can be crucial for businesses who are keen to test new approaches but are uncertain about whether the long term gains of exploring new products or services can justify the costs.

By providing generous tax advantages to firms carrying out eligible R&D activities, the program helps lighten the financial load associated with undertaking such work. The key objective is to stimulate an ecosystem that nurtures inventiveness, pioneering business approaches and overall economic progression.

How Does The Tax Offset Work?

The incentive works by providing a tax offset for certain expenditures incurred in R&D activities. The offset rate, however, varies according to your business’s aggregated turnover and is now based on a premium on top of your corporate tax rate.

Companies with a turnover of less than $20 million

For smaller companies with aggregated turnover of less than $20 million, the refundable R&D tax offset is your corporate tax rate plus an 18.5% premium which equates to 43.5% for most companies in this bracket.

The offset can also be refundable so if your company tax liability is reduced to zero you can access a cash refund for any unused offset amount.

Companies with a turnover of more than $20 million

For larger businesses with an aggregated turnover of more than $20 million, there is a two tier system based on their research and development expenditure as a proportion of their total expenses. This is referred to as R&D Intensity.

  • For research and development expenditure up to 2% R&D Intensity a non-refundable R&D tax offset equal to your corporate tax rate plus 8.5% premium will apply.
  • Those with expenditure above 2% R&D Intensity will receive a non-refundable R&D tax offset of your corporate tax rate plus 16.5% premium.

While they cannot access a cash refund for any unused offset amount if the tax liability is reduced to zero, it can be carried forward to future income years.

It’s important to note that these offsets are subject to annual limits and other conditions set by the Australian Taxation Office (ATO) and AusIndustry.

R&D Tax Offset Eligibility Criteria

Many business owners wrongly assume that the R&D tax incentive is only available to businesses involved in scientific research or laboratory work. However, in reality if, for example, you operate in the manufacturing, IT, software development, agriculture, engineering, mining or biotechnology sectors, this program could present a great opportunity to grow your business.

To be eligible for the R&D Tax Incentive, businesses must:

1. Be an Australian Resident Entity: The incentive is primarily for businesses operating and paying taxes in Australia.

2. Engage in Eligible R&D Activities: These activities should be aimed at acquiring new knowledge, creating new or improved materials, products, devices, processes, or services. The activities must also meet the definitions of either Core R&D activities or Supporting R&D activities as defined by the program.

3. Incur Eligible Expenditure: This includes staff costs, materials, overheads, and some contractor expenses directly related to R&D activities.

4. Companies must register their eligible R&D activities with the Australian Taxation Office (ATO) before claiming the R&D Tax Incentive. The registration must be completed by the deadline specified by the ATO.

How to Apply

Applying for the R&D Tax Incentive involves a few steps:

1. Register Your R&D Activities: This must be done annually with AusIndustry within 10 months after the end of the income year in which the activities were conducted.

N.B. The window to claim the R&D incentive for the 2023 financial year closes on 30 April.

2. Submit a Tax Return: Include the R&D tax offset amount in your company’s tax return.

3. Maintain Records: Keep detailed records that demonstrate your R&D activities and expenditures are eligible under the program.

The R&D Tax Incentive is a powerful tool for fuelling growth, encouraging businesses to push boundaries, test new ideas and pioneer groundbreaking solutions. In a world where innovation is key to success, the offset could be the stimulus your business needs to stay ahead of the curve.

The R&DTI represents a vital opportunity for SMEs in Australia to advance their innovative projects while mitigating financial risks. By understanding and utilising this program, businesses can not only contribute to their growth but also to the broader advancement of technology and industry in Australia. It is advisable for SME owners to consult with tax professionals or R&D experts to navigate the application process and maximise the benefits of this incentive.

How MGI Can Help You With The R&D Tax Incentive

With expertise in accounting, tax, technology and business grants, MGI can leverage our expertise to support your business in understanding whether this scheme is right for you. As well as supporting our clients with all aspects of claim compliance and preparation, we also assist with reviews and audits associated with R&D Tax Incentive claims. Contact our Business Advisory team and let us shout you a coffee to discuss your business goals and whether you can benefit from this tax offset.