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Quashing 10 Common R&D Tax Incentive Myths

The Australian Government provides eligible companies who engage in Research & Development (R&D) with a tax offset for expenditure on relevant R&D activities. However, many business owners are unsure of their business' ability to qualify for the incentive. In this article, our R&D experts quash 10 common R&D Tax Incentive Myths that stand in the way of many Australians' applying for the incentive.

Myth #1: I don’t work in a lab and therefore I don’t do Research and Development (R&D)

Incorrect! Innovation in relation to the R&D Tax Incentive program has a broad definition, making it applicable across a broad range of industries, not just those that require a lab coat and beakers. The key criteria to determining whether you’re undertaking R&D is whether your project is developing new knowledge within your industry and has technological uncertainty. It could mean that you’re prototyping, testing, or developing new products, processes or services.

The work you are doing may not feel like you are undertaking an R&D experiment, but if you don’t know how to get from A to B, there's a good chance you are about to embark on an R&D activity!   

Myth #2: I’m not eligible for the R&D Tax Incentive because I haven't completed my project yet

No way! The R&D Tax Incentive program is a year-on-year application process that serves to track each year how your innovation projects are progressing and how much was spent within each financial year. No need to wait until the project is finished to start applying!  

Myth #3: I’m only eligible for the R&D Tax Incentive if my project is successful

Not true! You can still apply for the R&D Tax Incentive even if you don’t achieve your objective. Failure is in fact a sign of technical uncertainty and that a challenge exists. The goal of the R&D Tax Incentive program is to inspire you to solve technical challenges and generate new knowledge in your industry, whatever the outcome. 

Myth #4: If I apply for the R&D Tax Incentive, my company's accounts will be audited

Not at all! Some companies worry about the disruption and expense of an ATO audit. If you receive an R&D Tax Incentive ‘request for information’ from the ATO, they are generally only investigating your R&D-related expenses; whether you have the documentation to support those expenses and that they relate to your R&D activities. The ATO doesn't need to investigate your entire accounts to determine whether you are eligible.

Myth #5: I’m already receiving another government grant so I am not eligible to receive the R&D Tax Incentive

That is not quite right! It is true there are measures to stop you from double-dipping and claiming two government grants that cover the same costs. However, if you are receiving funding for another aspect of the business, there is nothing stopping you from claiming your full R&D Tax Incentive. Where another grant may be used to cover some items that you are including in your R&D tax claim, a grant clawback will apply to reduce your R&D expenditure by the amount of the grant that was used to cover R&D expenses. 

Myth #6: I’m not eligible for the R&D Tax Incentive because my competitor already has a similar product in the market

Incorrect! Even if another company has a similar product or is already working on a similar R&D project, if the information to achieve the objective is not publicly accessible at the time you start your R&D project and you have to develop that new knowledge yourself, you could still be eligible for the R&D Tax Incentive. Often companies claim the R&D Tax Incentive when seeking to develop technologies where the competitor’s IP is well-guarded and the knowledge is not widely known.

Myth #7:  The financial year is already over, so I’m too late to lodge my R&D Tax Incentive application

No way! You have 10 months after your company’s financial year-end to lodge your technical R&D Tax Incentive application. E.g. If your financial year-end is 30 June, you have until 30 April the following year to lodge the application. You also have the normal four-year amendment timeframe to lodge your R&D tax schedule with the company tax return. But don't wait this long as the sooner you get your tax return lodged with the R&D tax schedule, the sooner you get your R&D Tax Incentive! 

Myth #8: If I don’t pay taxes, I can’t get the incentive

False! The larger 43.5% refundable benefit is targeted to Aussie start-ups and small/medium companies with an aggregated turnover of less than $20 million. If you don’t pay taxes yet, you get the bonus of receiving your R&D Tax Incentive as cash back to keep investing in your R&D projects! 

If you are in tax losses but have an aggregated turnover greater than $20 million, you are entitled to the 38.5% non-refundable benefit that can be carried forward as tax losses and used against future income tax payable amounts. 

Myth #9: I don’t have stringent timesheeting or scientific reporting systems to track my R&D project and therefore I can’t claim the R&D Tax Incentive

Not completely true...Though it is advised to have strong documentation prepared throughout the year to support the work you did on your R&D project; in some instances, meeting minutes, calendar entries, emails, internal reports and presentations, photographs and whiteboarding notes can be used to help support the activities undertaken during the financial year. The regulators don’t mandate timesheets and scientific reports, but they do require some documentation. 

We do advise that if you plan on claiming R&D over multiple years, it’s worth setting up robust documentation strategies to make sure you are keeping track of your R&D progress and aren't missing out on any eligible R&D activities or costs to include in your claim.    

Myth #10: Some of my R&D activities are undertaken offshore and therefore are ineligible to include in my R&D Tax Incentive application 

Not always true! If there’s good reason as to why you had to undertake part of your R&D activities offshore, such as access to facilities, populations, expertise or certain environments, then these activities may still be eligible. You will need to submit an Overseas Finding (Due 30 June within the financial year the activities are taking place) explaining why the activities needed to be undertaken overseas and that the expenditure spent overseas is less than the expenditure spent on Australian-based activities. 

In some circumstances, a company’s Australian activities are eligible for the R&D Tax Incentive and they can claim that portion without claiming the overseas expenses. 

Now that I have a better idea of my eligibility for the R&D Tax Incentive, how do I get started?

Phew! We’re glad we’ve tackled those pesky R&D myths that may have been preventing you from applying for government funding for your R&D activities. If you’re still not sure whether you are eligible for the R&D Tax Incentive, or you’d like to talk through your unique business or industry circumstances, please get in touch with our R&D advisors who are always happy to have a no-obligation chat.

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