How your startup could reap benefits from R&D expenditure

HOW DOES THE R&D TAX OFFSET WORK?

Some taxpayers may be entitled to tax offsets for R&D expenditure and the decline in the value of assets used in R&D activities.

  • What benefits do I receive?

Your company is entitled to a tax offset of 45% (proposed to be reduced to 43.5% from 1 July 2014) of the cost of its R&D activities if it has an aggregated turnover of less than $20 million.

Each dollar of tax offset will reduce your company's tax liability by a dollar.

The tax offset is refundable, so if it exceeds your tax liability you will receive a refund of the balance from the ATO.

  • Am I entitled to the tax offset?

The tax offset is available to body corporates incorporated in Australia and also to foreign body corporates that are resident in Australia or that carry on business in Australia through a permanent establishment.

Your company must register its R&D activities with Innovation Australia before making a claim in its tax return.

In general, your company's notional deductions must be more than $20,000 per annum and the R&D activities must be conducted in Australia.

HOW CAN MY BUSINESS USE THE R&D TAX OFFSET?

If your company is entitled to a refund of tax, it would ordinarily wait until the end of the financial year to receive the refund.

However, some lenders may be willing to lend your company money in anticipation of your future receipt of that refund. This means you may be effectively able to monetise the tax offset before receiving potential tax refunds.

WHAT ACTIVITIES GIVE RISE TO THE R&D TAX OFFSET?

The R&D activities must generate new knowledge by experiment using the scientific method. This must proceed from a scientifically-based hypothesis and use experiments to reach conclusions that could not otherwise be determined in advance on the basis of current knowledge. It also includes activities that support R&D activities. However, it excludes certain activities such as market research and prospecting.

  • Examples of eligible R&D activities include:
    • Developing innovative new software applications
    • Developing new materials, such as for:
      • mobile devices
      • prosthetics and other biomedical devices
      • sporting apparatus
    • Research into new drugs and other medical treatments
    • Developing new methods of extracting minerals and other materials
    • Developing new solar cell technology and other clean energy products
    • Creating more efficient engines and other devices
    • Developing new manufacturing techniques
  • R&D expenditure for which you can potentially claim a tax offset include:
    • Costs of purchasing goods and services
    • Costs of running equipment
    • Depreciation of machinery
    • Employee salaries and wages