6 things startups need to know about the R&D tax incentive

It’s one of the most beneficial programs for startups in Australia, and yet too many businesses leave it by the wayside.

The R&D Tax Incentive is one of those few and precious allowances that can actually relieve cash flow woes. Better still, it provides businesses with an incentive to actually create new products by testing ideas they may otherwise feel are too risky.

Many startups might think the R&D Tax Incentive is too complicated for them to understand, and that applying isn’t worth the hassle. PwC Australia provides niftyforms.com so startups can complete their R&D claims online themselves and have it reviewed and finalised by a PwC specialist.

The incentive gives startups up to 45c back for every dollar they spend on R&D (as long as they earn under $20 million in a year).

That is no small rebate.

Damien Williams, Head of Finance at People Analytics platform provider CultureAmp, says the R&D incentive has been instrumental in the company’s success.

“If we didn’t have investors, and they weren’t investing with us at the level they are…the R&D incentive can really be that last line for cash flow survival,” he says.

“The most important metric is cash runway for startups. Having access to the R&D incentive is really a competitive program, it gives us a competitive advantage over those companies that don’t access it,” meaning those in Australia, and of course those overseas that cannot.

Here are the six things you should know about the scheme.

1. You don’t have to be in tech

Some startups might think they have to be working in hardware to make a claim. Not so. As Brendan White from PwC Australia says, your work just has to be technical in nature.

“You could be in software engineering, agriculture, in the energy sector…we see a lot of innovation in the food and beverage industry too,” he says.

“R&D in this context is really about solving problems and encouraging new solutions – as long as you’re going through a process of testing and you didn’t know how to solve the problem at the outset, you should be looking into making an R&D claim.”

2. The Incentive is something you should budget for

White says the incentive shouldn’t be a surprise. It’s something businesses should keep in mind throughout the year as they’re conducting their activities, and plan to re-invest the refund the next year.

“Startups see it as a lifeline. The forms become available on July 1, so if you get your project registered, and get your tax return lodged within a couple of weeks, you could get your cash back within four to six weeks.”

This is really just  matter of being organised, and there are resources out there, like Nifty R&D, that can help you manage the process.

3. Businesses must be incorporated

Sole trader or in a partnership? Only companies incorporated in Australia are eligible. Have a chat to your accountant to see if you should really be operating under a company structure.

4. Record keeping needs to be top notch

Your tax records should be in shape anyway. But as White says, regulators will knock on the door every three to four years.

“There have been a few cases where a claim was rejected because there was no evidence,” he says.

Records can include emails between staff, purchase receipts, and so on. Just make sure you have it all squared away.

5. Software projects should impact a customer directly

You can’t just improve your internal systems for your own company and claim it as research. The incentive has been updated in the last few years to make sure software projects have a direct impact on your customers, not just for your own internal reasons

6. Overseas costs are a no-go

Sending some coding offshore? The program is supposed to incentivise on-shore R&D so in most cases you can’t claim those costs back.

Summary

It’s clear that examining your eligibility for the government’s R & D Tax Incentive scheme should be a priority for all Australian startups. It’s more than just a grant – for many businesses it can mean the difference between survival and shutting up shop.

Find out how Nifty R&D helps businesses claim the R&D Tax Incentive online.