R&D Tax Incentive for Startups
The Research and Development (R&D) tax incentive is the government program that provides the best support for claiming R&D tax incentive for startups in Australia. It is available to businesses of all sizes that conduct eligible R&D Activities. The government spends about $3 billion each year for the program, and two thirds of that amount goes to companies with less than $20 million gross revenue. Startups are the biggest beneficiaries of the R&D Tax Incentive as they receive the 43.5% refundable tax credit that provides a cash infusion for their company. If you are a startup company and are intently doing R&D, the R&D tax incentive program should be a key part of launching your business.
At Innercode, helping software and technology companies to access the R&D Tax Incentive is one of our specialties. We know how important the incentive is for startups so no matter the size of the claim we provide a comprehensive service that scales as your business grows.t Innercode helping software and technology companies to access the R&D Tax Incentive is one of our specialties. We know how important the incentive is for startups so no matter the size of the claim we provide a comprehensive service that scales as your business grows.
How does the R&D Tax Incentive work for startups?
The government uses the company tax return as a way to distribute much needed funds for startups. It does this through tax incentives that ultimately go back to companies as tax refund. To apply, a company must first lodge an application form with Ausindustry and then lodge with the ATO an R&D Tax schedule as part of their tax return. At Innercode, we provide end-to-end assistance for completion of both the R&D claim form and the R&D Tax schedule.
How much can you receive, what are my chances of success?
The great thing about the R&D Tax Incentive is that it is an entitlement program, which means that any company doing R&D in Australia that meets the criteria, can apply for the benefit. It is not a competitive grant, and it can be relied upon so long as the company continues to meet the criteria of the scheme. The benefit for a pre-revenue startup is that for every dollar they spend on R&D expenses such as labour (i.e., wages/contractor costs), they get the 43.5% benefit back as cash through a tax refund.
Startup companies who successfully receive the incentive typically have the following in common:
1. At least $20K minimum expenditure on R&D during the financial year
R&D related expenses can include wages, contractor fees, equipment, rent, web hosting, cloud service, software and hardware costs which can be claimed
We can help to maximise your benefit by quantifying the expenditure you can claim according to the rules and regulations of the scheme. Our experience with software and technology companies means that we know how to get the most out of your claim. We can also assist with the record keeping requirements to keep you on track with compliance.
2. Innovative activities of a project and the scientific process
It is very common for startup companies to offer something new to the market, including developing new products. However, this is commonly confused with conducting eligible R&D activities. The definition of R&D in the legislation applies not to the project as a whole, but to specific technical activities involved to complete it. If a project is innovative or novel but the activities involved to create it are not using the systematic experimental method and meet the new knowledge requirements, then it is not eligible for R&D tax incentive.
Software Development is one of the most challenging industries to access the scheme. At Innercode, we specialise in taking on that challenge. We can help explain how the software activities or hardware activities you are doing or plan to do meet the scientific process requirements of the AusIndustry scheme. The requirements to meet are strict and are not reflected in a normal software development cycle process. Therefore, to claim a software-based R&D claim, particular processes need to be undertaken and documented.
3. Project core activities that attempts to fill in a knowledge gap and try to create new knowledge in the process
Applicant companies are expected to conduct a literature review or consult industry experts before claiming that their project activity is an R&D experimental activity. In many cases, a technical uncertainty that a project activity aims to shed light on can be resolved by applying expertise. To claim R&D activities they must be beyond existing knowledge and expertise. Some examples of eligible R&D activities include:
1. Creating a new algorithm or significantly improving the existing ones
2. Invent new approaches for image/video processing
3. Developing new data structures or improving the existing method of capturing, storing, and manipulating data
4. Developing state-of-the-art or novel approaches for building software or functionality of a system
Eligible R&D activities are usually unique and may not fit into general examples. We can help with substantiating those activities to determine what the new knowledge you are creating as part of the project that would meet the criteria of the scheme. We can also help to establish the processes and documentation to evidence the new knowledge you are generating.
4. Good record keeping
Startup companies are always striving for efficiency and hence, it is not surprising to see that majority of them adopt agile methodology for project management and software development. However, with agile, the documentation stage is usually shortened. To be successful with the R&D Tax Incentive, it is important to keep detailed documents or records of R&D activities including literature reviews, consultations with experts and experimentation plans. Through keeping these documents, you can prove that a project activity is indeed an R&D activity as defined by legislation. Companies must also keep a record of expenditure items relevant to their R&D claim.
We can help with providing very specific advice on record keeping that matches your existing systems and processes. We recognise that it is best to harness the tools that you already use rather than try to force a brand new one. This leads to a much better rate of adoption by team members and greater success in the long term.
5. Have a great claim process
Self-assessing the eligibility of your R&D activities may seem daunting. But by having the right advice straightaway, you can be sure of maximising your R&D tax claim. We at Innercode have years of experience delivering R&D tax incentives to numerous software and technology companies, most of which were startups when we first assisted them. Through our streamlined process of analysing claims, with just a few hours of your time, we are confident that we can help you determine your eligible projects and activities.
Our streamlined process means that you don’t have to spend endless hours trying to work out what counts as eligible and try to write your project and activity descriptions in a way that would meet the requirements. R&D claims are one of the most unique and regulated areas in taxation. Without specific knowledge and experience, it is impossible to correctly maximise a claim.