Two Ways You Can Offset Your Research & Development Expenses

FILED UNDER: SMALL BUSINESS, TAX, GRANTS


Conducting research and development (R&D) activities provides a lot of benefits for many organisations. A well-planned and successfully executed R&D undertaking makes it possible for organisations to turn their ideas and theories into sustainable innovations, which in turn allows them to open more doors for growth. This enables new and improved products and services, higher returns, and a bigger market share.


R&D is not without challenges, though. Not only does it require a lot of time and effort, it can also be expensive. To offset this, organisations can look into a number of options, including grants and R&D tax incentives for small businesses.


R&D grants and assistance


The most well-known provider of R&D grants in Australia is the Department of Industry and Science. Offering what is called the Accelerating Commercialisation (AC) grants option under the Entrepreneurs’ Infrastructure Program, the department aims to aid entrepreneurs in the development of their intellectual properties such as technology-enabled products.


There are also the Commercialisation Australia and Accelerating Commercialisation programs, which both offer grants to promote the commercialisation of products, services and processes by providing funding for small, technology-based companies during the seed, start-up and early expansion stages of development.


These and other similar grants offered by the Australian government and private organisations are not for everyone, though. With limited slots available and the strict qualifications, not to mention the stiff competition, the chances of securing grants like these are smaller.


R&D tax incentives for small businesses


Another way of offsetting costs associated with R&D is through state tax incentives. The goal of these tax incentives is to promote R&D engagements that benefit the whole country, among businesses and organisations, by providing tax offsets for R&D activities if they are eligible.


R&D tax incentives have two components, a 43.5% refundable tax offset for eligible entities with an aggregated turnover of less than $20 million - unless they are controlled by tax exempt entities or a % non-refundable tax offset for all other eligible entities.


The rate of the R&D tax offset is reduced to the company tax rate (currently 30%) for that portion of an entity’s notional R&D deductions that exceeds $100 million for an income year.

As per ATO guidelines, those who are awarded the tax offset may also be able to carry forward unused offset amounts to future income years.


Below are the qualifications for R&D tax incentives according to the ATO:


  1. Incorporated under Australian law
  2. If incorporated under foreign law, the organisation must be an Australian resident for income tax reasons.
  3. Those who are foreign-incorporated must also be both (1) a resident of a country with which Australia has a double tax agreement that includes a definition of 'permanent establishment', and (2) carrying on business in Australia through a permanent establishment as defined in the double tax agreement.

Non-eligible entities include:


  • Individuals
  • Corporate limited partnerships
  • Income tax-exempt entities
  • Trust

Grants vs tax exemptions


With the strict eligibility requirements and stiff competition involved with R&D grants, the chances of getting funding is small. In comparison, R&D tax exemption requirements are easier to meet; in fact, many organisations are eligible for R&D tax exemptions and they don’t even know it.