Does your startup undertake research and development activity? You may be eligible to the Australian Government’s Research & Development (R&D) Tax Incentive to offset the costs of R&D and improve your startup’s cash flow. The incentive scheme offers a refundable 45% tax offset for startups with an aggregated turnover of less than $20 million per annum, as well as a non-refundable 40% tax offset for other eligible companies.
What is the R&D Tax Incentive?
The Research & Development (R&D) Tax Incentive is a program that aims to boost productivity and company competitiveness. The program is administered by the Australian Tax Office (ATO) and AusIndustry (on behalf of Innovation Australia). The ATO determines the eligibility of startups and businesses and also expenditure incurred and claimed under the incentive program.
The program operates as a tax offset – this means that if your startup carries out eligible R&D activities, it can receive a reward back from the government. The ATO website sets out the eligible deductions as well as a Research and Development Tax Incentive Calculator to assist you to determine your tax offset claim. You should check whether your startup is eligible to receive the tax refund as it can provide a substantial cash injection to your startup.
Eligibility for Research and Development
To receive tax benefits from the R&D Tax Incentive, your startup must be registered to access the scheme with business.gov.au. Your startup must be incorporated under Australian law, or incorporated under foreign law but considered an Australian resident for income purposes (or a double tax treaty applies). Registration must take place after R&D activities have been undertaken. The incentive program operates on a self-assessment basis. This means that startups are responsible for ensuring they are eligible for the program and registered R&D activities.
The eligibility requirements for R&D are broad. Your startup does not need to be operating a science lab or designing flying cars. Your startup may meet the eligibility requirements by simply developing a new or innovative process, product, piece of hardware or service. By challenging or testing an idea, or conducting research or testing a hypothesis, this may meet the eligibility requirements.
The deadline for the lodgment of an application is ten months after the end of a startup’s income year. For startups that operate in the standard income period from 1 July to 30 June, registration applications must be received by 30 April of the subsequent year. If your startup operates in the non-standard income period of 1 January to 31 December, the application for registration must be lodged by 31 October of the subsequent year. As of 1 July 2014, there is a $100 million threshold that applies to R&D expenditure. For startups that spend above this threshold, a tax offset can still be claimed at the company tax rate.
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For startups that operate in the 1 July to 30 June calendar, now is the ideal time to assess whether your startup may be eligible for the R&D Tax Incentive before 30 April. As an eligible early stage startup, receiving the R&D Tax Incentive can significantly improve your cash flow. Remember, the R&D Tax Incentive is an entitlement program – this means that it is not a competitive process nor a first-come, first-served basis. So long as your startup is eligible and carries out eligible activities, your startup is entitled to the tax reduction or refund. If you have any questions about the R&D Tax Incentive, get in touch with our startup lawyers.
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