Claiming R&D Tax Offsets in Australia – Times Have Changed

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Research and development – or, R&D, as it is more commonly known as – refers to a set of innovative activities undertaken in an effort to develop entirely new products or services (or improve upon those that already exist).

Which entities perform R&D? A lot, actually. Be they from the realm of enterprise, government, or academia, R&D often proves vital toward a team or country’s ability to attain long-term success, no matter how they choose to define and measure it.

R&D processes are, by definition, notoriously difficult to manage. In other words, the entire reason that researchers are performing research is because they do not yet know how to accomplish their desired outcome; good luck managing the unknown!

The perceived importance of R&D is very much underscored when you consider the fact that – despite these management-related difficulties – governments across the world continue to financially incentivise the undertaking of R&D. As a percentage of gross domestic product (GDP), OECD member countries spend an average of 2.38 percent on research and development (far above Australia’s sluggish 1.88 percent).

“Innovation is the central issue in economic prosperity.” – Michael Porter (Harvard Business Professor)

How do governments financially encourage R&D? Their annual budgets will include an amount dedicated toward research funding, which is then spent on a whole host of initiatives. In Australia, universities receive the largest proportion of the federal government’s research-related funding. This is shown in the below graphic depicting how the Australian government invested its $10.3 billion in R&D between sectors for the 2017-18 financial year. Virtually all of this $3.6 billion for higher education research was provided through research block grants (i.e., $1.943 billion) and competitive grants.

Enough about universities, though. Let us now shift focus to businesses in the context of government R&D spending. To the surprise of many, Australia is unique in the sense that the largest proportion of the federal government’s R&D-related spending does not come from issuing grants or funding research agencies, but rather, through R&D tax incentives. Indeed, of the $10.3 billion referenced above, a whopping $3.138 billion of that went to an R&D tax incentive program; dwarfing the second-largest R&D investment: research block grants (also mentioned above).

Known as the Research and Development Tax Incentive, the R&DTI – as it is more commonly referred to as – provides a tax offset for a portion of a company’s cost of doing eligible R&D activities by reducing a company’s income tax liability. As the above-referenced statistics infer, the scheme is largely considered the backbone of research and development in Australia and is used by over 13,000 businesses of all sizes, be they a technology startup, small- and medium-sized enterprises (SMEs), or a large-scale Australian company.

R&D Tax Incentive at a Glance – Department of Industry, Innovation and Science

A highly relevant recent development worth mentioning is the 2018-19 budget’s implementation of numerous R&DTI reforms. These came on the back of a formal R&DTI review’s “recommendations to improve the effectiveness, integrity and additionality of the program.” The introduction of these reforms prompted a sweeping crackdown on previously awarded incentives. Particularly hard-hit were software-based companies, with the likes of Airtasker and Digivizer ordered to repay rebates totalling hundreds of thousands of dollars each after audits revealed erroneous claims.

At the time, these reforms undoubtedly shook a lot of R&DTI claimants. This is, however, no reason to be deterred from claiming an eligible tax offset. That said, it is both exhaustive and time-consuming to properly understand the R&DTI’s eligibility criteria, not to mention the various tax recording-related changes it demands. As a registered accounting firm, Ashfords are more than capable of providing support on such matters.

“Exploration is the engine that drives innovation. Innovation drives economic growth.” – Edith Widder, Ph.D. (CEO & Senior Scientist, Ocean Research & Conservation Association)

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