4 Ways the R&D Tax Incentive benefits Businesses

The importance of robust research and development cannot be understated as it underpins the enduring competitive edge of businesses in an increasingly globalised market. It is, therefore, in the best interests of the government to assist the business sector in pursuing R&D projects that may carry a lot of financial risk, but stand to benefit the broader economy significantly.

There are a number of ways a government can help to foster innovation. In Australia, the primary mechanism implemented by the government to help ease the financial burden of developing new products and services is the R&D Tax Incentive. Here are four ways businesses stand to benefit from this program.

Uncapped cash benefits for smaller businesses

In previous iterations of the R&D Tax Incentive scheme, refunds of tax credits for companies with an annual turnover of less than $20 million were capped at $4 million. Any excess tax credits would be rolled over to the next year as a non-refundable offset. In its current form, the scheme no longer puts a threshold on how much a company may claim back as a refund. 

This change provides a great benefit to smaller entities looking to maximise their claim as it frees up funds sooner and gives companies greater control over their resources. It may also encourage greater funding of R&D activities. 

Supports businesses during the COVID-19 pandemic

The pandemic has been an extremely challenging time for many businesses, and the need for a mechanism such as the R&D Tax Incentive has been highlighted more than ever. In the process of developing products in response to the pandemic, R&D Tax offsets returned millions of dollars to Australian pharmaceutical and biotechnology companies to offset their expenses.

Also, many businesses have felt the need to investigate options regarding the development of new products and services to help them break into new markets as a means to remain viable. Any eligible expenditure conducted for these purposes may be included in a tax claim. However, any expenses incurred prior to 30 June 2021 will be subject to the previous offset rates which are:

  • a refundable offset equal to 43.5% of eligible expenditure for companies with annual revenue below $20 million
  • a non-refundable offset equal to 38.5% of eligible expenditure for companies with annual revenue of $20 million or more.

Maintains Australia’s international competitiveness

The R&D Incentive program is one of the most generous in the OECD, and offers some flexibility in how companies pursue their R&D. For example, the scheme contains provisions for R&D activities conducted in a foreign territory subject to certain criteria:

  • the activities must be registered with AusIndustry and be found eligible through an advance finding. (Claimants may apply for an advance finding of an activity through AusIndustry)
  • the activities must have a substantial scientific connection to core activities undertaken in Australia
  • proof the activity cannot be undertaken in Australian territory for a reason covered in the Industry Research and Development Act 1986
  • expenses associated with the activities do not exceed those incurred by activities undertaken in Australia.

Providing for companies who find it necessary to pursue international research opportunities broadens the scope of R&D activities that a business may include in a tax claim. 

The program also covers R&D activities carried out solely in Australia by foreign companies, provided the company satisfies the following conditions, per the ATO website:

  • incorporated under a foreign law and you are both:
    • a resident of a country with which Australia has a double tax agreement, with a definition of ‘permanent establishment’
    • carrying on business in Australia through a permanent establishment as defined in the double tax agreement.

This strongly encourages foreign companies to bring their resources into Australia, making Australia a vibrant and attractive location for foreign investment and strengthening the business landscape. 

Supports long term investment

The R&D Tax Incentive is applicable to activities that occur over several financial years, recognising the research and development period is often a long and difficult one.

Pharmaceutical and biotechnology companies in particular have to make especially high R&D investments. The path to developing new medications and other biotech products is often drawn out over many years. Having tax incentives that continue to provide support throughout the entire process is an invaluable asset. 

Want to find out how Clearpoint Ventures can maximise your R&D Tax claim, simply? Contact us today for an obligation free discovery chat. 

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