Claiming the R&D Tax Incentive is a two stage process. Here's how it works.
💡Remember you must submit any claims by 30 April for the previous financial year
The two stages are:
- Describing your R&D project/s in a registration submitted to AusIndustry
- Claiming your eligible R&D expenses in a schedule as part of your tax return lodged with the Australian Taxation Office (ATO)
What does eligibility involve?
You are likely to be eligible if you:
- Are a company developing a unique, non-trivial software, hardware, engineered or manufactured product, process or service (i.e. it’s not just for software companies)
- Can describe this as a series of experiments with unknown outcomes from which you have learned as you’ve progressed these developments
- Have at least $20K of eligible expenses on R&D from the prior financial year
Eligible expenses include:
- Salaries of staff involved in R&D
- Contractors involved in R&D and working inside Australia
- Costs of equipment and operations related to R&D
- Other direct costs such as R&D-related travel
- Some indirect costs such as rent and utilities
- Depreciation of assets used for R&D
Ineligible expenses include:
- Salaries of staff not involved in R&D
- Contractors not involved in R&D or working outside Australia
- Costs of equipment and operations not related to R&D
- Legal and accounting costs
- Marketing or advertising costs
- Expenses on R&D from this financial year
How do you get the money?
Accessing the refund is two-step process:
- You need to describe your core and supporting R&D activities as a series of experiments in a registration to AusIndustry; this will typically be approved by the Industry Innovation and Science Australia (IISA) board, but might be scrutinised by AusIndustry reviewers at some later date. Startup savvy R&D tax experts like Standard Ledger have lots of experience in preparing these registrations.
- A summary of the eligible R&D spend is included as an R&D tax schedule in your tax return lodged with the ATO; this might be scrutinised by ATO auditors. Startup savvy tax agents like Standard Ledger have lots of experience in preparing these schedules.
If you’re an early-stage startup (under $20 million turnover), the R&D tax incentive is technically a refundable tax offset, meaning you can effectively cash out any tax losses rather than carrying them forward.
- If you’re not yet profitable, and have enough tax losses, you will receive a 43.5% cash refund from the ATO. You can expect the ATO to clear your refund in four to eight weeks after lodging your tax return.
- If you’re already profitable, and in a tax payable position, your R&D claim will reduce the tax that you’d otherwise be paying, but be aware that the benefit is a 16% one (the difference between the 43.5% R&D offset and small business company tax rate of 27.5% … yep it can get a bit technical!)
If you're a typical early stage startup in pre-revenue development mode, and have not made a profit, on a $100,000 R&D spend the maths looks like this:
|Your R&D spend||$100,000|
|You claim 43.5%||$43,500|
|LESS preparation fee||$3,500|
|Your net benefit||$40,000|
In the current climate of increasing audits, you want to make sure your records are up to scratch.
- For financial records, make sure you’re able to provide any underlying payroll details or copies of external contractor services you’ve used for R&D, for example. As part of Standard Ledger’s ongoing bookkeeping services we include the Receipt Bank App/email to “Snap n Send” your source invoices; you’ll be ready with full documentation should you be faced with an ATO audit.
- For evidence of R&D activities, you’re going to need to show how you identified and tracked the eligible R&D activities (as well as the basis under which those records have been used to determine the associated R&D spend).