WHAT IS R&D?
R&D (Research and development) for software requires that as part of your development, you encounter technical challenges or difficulties that could not be easily solved with normal research. To overcome these issues or to create the functionality that you desire, you undertake an “experimental process” to solve the problem. An “experimental process” in software is typically where you have tried different methods, different algorithms, different structures or techniques to solve the challenge.
R&D TAX INCENTIVE
The Australian Federal Government offers a tax incentive for companies undertaking research and development (R&D). We specialise in obtaining these incentives for software and technology companies as well as startups that are building product at the leading edge of their industry.
The R&D Tax Incentive caters for companies with under $20 million in turnover with a 43.5 cent refundable tax credit for each dollar of R&D undertaken. For companies with over $20 million in turnover, a non-refundable tax offset of 8.5% above the company’s tax rate for expenditure up to 2% of overall expenditure. In addition, for R&D expenditure over 2% of overall expenditure, the company receives a 16.5% non-refundable tax offset.
RECORD KEEPING FOR THE R&D TAX INCENTIVE
We also assist with the assessment and verification of the required documents to evidence the claim. The R&D Tax Incentive requires records to be kept as evidence that the claimed activity is occurring and that it is experimental in nature. We can assist in reviewing your existing record keeping process and we are happy to advise where required on ways to make it compliant for the R&D Tax Incentive.
WHAT CAN I CLAIM FOR THE R&D TAX INCENTIVE?
For the R&D Tax Incentive, we are able to claim a range of expenses that must be linked to the research and development project. Typical expenses are the wages of developers, project managers and engineers working on the project. We assist you by quantifying the expenditure related to the project to ensure that your claim is both maximised and compliant.
EXAMPLES OF R&D IN SOFTWARE SUITABLE FOR THE R&D TAX INCENTIVE:
– Where you are developing on, or interacting with, a new or undeveloped platform or language that requires experimenting to achieve the functionality goals that you are striving for.
– Where you are developing new functions/methods in a program to automate manual processes or eliminate human intervention.
– Where you are building new data extraction techniques from multiple sources with different data structures and formats.
– Where you are creating new methods of analysing and processing unstructured data that have previously not been utilised by other technologies or companies.
– Where you are developing new predictive algorithms that are not yet existing with unique parameters and weights applied to a complex set of data.
How can R&D Tax Incentive help you and your company:
1. The Research and Development tax incentive will help your company survive long-term R&D projects before you start earning income from them.
2. Conducting Research and Development can be both risky and highly rewarding. The R&D tax incentive can help to encourage your company to undertake these projects that can transform the company.
3. The R&D Tax incentive will help you attract investment when undertaking R&D projects.
4. The incentive can help to keep highly skilled workers that undertake the R&D projects.
5. By being granted the R&D Tax incentive, it can help you to become eligible for other incentives such as the Early Stage Investor Incentive, which can help to attract more investors.
Pros and Cons of R&D Tax Incentive
Pros of the R&D Tax Incentive Scheme:
1. Entitlement scheme
Unlike other types of grants, the R&D Tax Incentive is not a competitive grant, so you don’t need to compete with other companies. So long as your company, projects and expenses meet all of the eligibility requirements, you will get the benefit.
2. Scales with your expenditure
The R&D Tax Incentive scales as your company grows. It’s a program that can benefit both the youngest startup and a major multinational company. There are no company size requirements, the limits are based on R&D expenditure, with the minimum being $20,000 and the maximum $150 million in a financial year.
3. A Tax incentive that is great for startups and early stage companies
The R&D Tax Incentive is most beneficial for startups and loss-making companies due to refundable components. If your company’s annual turnover is less than $20 million, you can get a 43.5% refundable tax offset. The ATO refunds cash through your company tax return when you have sufficient tax losses and R&D expenditure. For example, if you spent $200,000 on R&D as a pre revenue startup, you could get a $87,000 tax refund.
The R&D tax incentive is accessible to companies of various industries – software, hardware, medical devices, manufacturing, agriculture biotechnology, and mining among others. The main criteria to meet is that you have an eligible company, that you have at least one eligible core R&D activity and eligible R&D expenses.
Cons of the R&D Tax Incentive scheme:
1. The R&D Tax Incentive is enmeshed in tax legislation
Australian Taxation Legislation is considered to be one of the most complex legal systems in the world. The R&D Tax Incentive is a part of that system and framework; therefore, it adds significant complexity to the program as it leverages parts of other taxation legislation. If you are not preparing and lodging your own tax return, then you should not be preparing your own R&D Tax Incentive claim. There are special tax agent licenses just for the Research and Development Tax Incentive.
2. Complicated eligibility criteria
The R&D Tax Incentive is one of the most complicated parts of Australian Taxation Legislation. The vast majority of accountants and tax professionals are unable to properly advise on the R&D Tax Incentive. Besides the complexity of entity rules, expenditure rules and other taxation elements, the R&D Tax Incentive also has unique requirements in taxation where R&D projects and activities need to be assessed as to their eligibility. This requires specialist skills and experience, with specific knowledge of the technical field you are in as well as experience dealing with AusIndustry audits and reviews. The R&D Tax Incentive is self-assessment, so there is an onus on the taxpayer to get the R&D claim right when they lodge, with penalties applying if they do not understand the requirements or claim activities or expenditure erroneously.
3. Changeable regulatory environment
The R&D Tax Incentive is managed by two different government entities, the ATO manages the expenditure side of the claim, while AusIndustry manages the project side of the claim. This means dealing with two different departments, with different requirements, cultures and idiosyncrasies. While the legislation for the R&D Tax Incentive has been largely stable the past 10 years, the regulation of the R&D Tax Incentive by these two bodies has varied over time. As there is a lack of legal precedence in many areas of the R&D Tax Incentive, the way that these entities apply the rules can make a significant difference in Audit situations.
Why you need Innercode:
Innercode has specialist expertise in both the software and technology industries as well as the R&D Tax Incentive. For over 10 years, the team at Innercode has been assisting with the R&D Tax Incentive for software and technology companies. We have seen clients who have started with us as pre revenue startups become multibillion-dollar enterprises. We are best placed to maximise the R&D activities and benefit while minimising audit and regulatory issues. With our help we can make claiming the R&D Tax Incentive the most beneficial and easiest process possible, as you can rely on both our technical knowledge and knowledge of the R&D Tax Incentive.