The Government looks set to revise and revamp the lucrative R&D tax incentive. Despite a near 75% increase in applications for grant money that rewards innovation since 2011, the $3 billion grant has been seen as prone for exploitation. But with a shake-up in the air, there is no reason small businesses should not properly integrate the R&D tax incentive into a strategy for innovation.

Treasurer leans toward change in the May Budget

The grant currently accounts for a third of federal government spending on science and innovation, and the Treasurer is not happy about where that money has been going.

Earlier this month, Treasurer Scott Morrison expressed his concern that the R&D tax incentive was being “taken for a ride” so that, in effect, the government is “writing blank cheques to everyone that has a good idea”. "It is not a tax concession designed for businesses to exploit as a proxy for achieving a lower tax rate”, he said, pointing strongly to a complete overhaul of the incentive so as to clamp down on businesses who claim innovation but are in actual fact conducting ordinary business without research.

The exact shape of this overhaul will be apparent in the May budget. But the nature of these changes can be anticipated, since this concern from administrative bodies about the R&D grant has by no means come out of the blue.

R&D Tax Incentive reforms have been on the horizon

An incentive rate of up to 43.5% for research and development is not to be scoffed at – indeed, it has attracted a significant number of claimants. But as we reported in December last year, this popularity has also come with the increasing censure and ire of administrative bodies. The increase in numerous types of business' claiming this incentive has led to an increase in claims that have been considered not to be genuine.  Activities that are not R&D have been claimed as such. Usual business practices have been submitted as innovative activity.

The government perceived money which was to be spent on national innovation and scientific development was being wasted on applicants who were seeking little more than a tax concession.

And so, they acted accordingly. The ATO and AusIndustry significantly increased review activity. Warnings, audits, and legal action has been enacted against claimants and advisors; a number of R&D tax advisors have faced criminal penalties.

In light of increasing costs and the perception of endemic rorts, Innovation and Science Australia advised change and the “Review of the R&D Tax Incentive” (the Finkel Review) urged likewise. These suggestions provide a clear guideline of the potential direction the government is likely to head toward when they announce their R&D tax incentive overhaul. They include,

  • A $4 million annual cap with a $40 million lifetime cap;
  • An intensity threshold of 1% of total annual expenditure, so at least 1% of total expenditure must be incurred on R&D in order to claim;
  • Tightening of application procedures for software R&D;
  • Closer scrutiny and tighter rules for inclusion of ordinary business expenditure as R&D;
  • A premium for R&D expenditure undertaken in collaboration with publicly-funded research organisations, such as universities; and
  • Public rulings, guidance in plain English and reform of the current two-agency delivery model.

The root of the problem is the heart of an opportunity

The impending crackdown on eligibility and narrowing of use of funds may put off many businesses. But in the Government’s recent crackdowns and current plan for an overhaul, there are still vital reasons for small businesses to sit down and plan how they might invest in innovation through this grant.

  1. The Government is still keen to invest in nationwide scientific and technological innovation. The “Australia 2030: Prosperity Through Innovation” report released in January is an indicator of this. The overhaul has been put in terms of a relaunch, which begs the question: if the Government is keen to continue to invest in business research and development, how best can your business take advantage to innovate?
  2. There is an issue of documentation. There are numerous cases of government officers rejecting activities which claimants’ maintain constitute genuine R&D, while there have likewise been many disputes over what documentation is required to demonstrate such R&D activities. This effectively means that no application, and likewise no narrowing of eligibility, is likely to circumvent the wiggle room open to claimants, if they have documentation and a clear understanding of R&D activity. In fact, many government officers struggle to understand R&D since they lack scientific backgrounds and therefore do not adequately grasp how the science links back to the business and to the activity being claimed as R&D.

So, how do you innovate and still take advantage of this considerable grant?

The right advice makes the most of R&D

As mentioned, a number of R&D tax incentive advisors and specialists have been targeted by the government for perceived rorts. Yet in light of this, and due to the proposed overhaul, it is all the more imperative that small businesses turn to experienced and thorough R&D tax incentive experts to secure their claim.

While good advice is hard to come by, there are some typical hallmarks of a competent R&D grant advisor:

  • They are able to help clients document R&D activities in such a way that it is demonstrable that these activities lead to new knowledge being created, and does so in a scientific manner. Hence they understand the definition and scope of research and development and the scientific definition undergirding innovation.
  • They can demonstrate the connection between expenditure and the R&D activities.
  • They are able to emphasise the meeting of innovation criteria and the connection with expenditure in clearly presented lodgements to the ATO and AusIndustry.
  • They perform a documentation review. Documentation is the primary source of disputes and proper advisors will clearly outline the narrow criteria of eligibility in comparison to a client’s documentation.
  • They are able to review documentation for previous claims. Competent R&D grant advisors do not rest on their laurels about past claims given the current climate of scrutiny and punitive action. There is no limit to how far back the ATO can go when it comes to reviewing R&D claims, unlike limits on income tax and GST reviews.
  • They are able to present and explain documented eligibility clearly with the ATO in the event of an audit. Moreover, they have had experience representing clients in such audits.

If you have the right advice, this current climate of wariness surrounding the R&D grant clears away like so many grey clouds. The capacity to meet narrowing access criteria and gain the grant has the potential to boost everything you do in your business.

This applies to any business in any industry. As part of any business function, from the product, to the way the product is created, or to the nature of the business systems behind the product, there are always problems that need to be solved. In solving these problems new knowledge may be created. Tests can verify new pathways in the market and industry. And so long as this process is scientific, the R&D tax incentive is open to you.

Calibre Business Advisory has extensive experience in not only helping businesses determine whether activity is R&D or not, but also in presenting this in the form of documentation to the ATO and AusIndustry. 

Our approach is honest. Regardless of the tightening of applicability and the coming overhaul, we will let you know if there is 100% chance or 0% chance of you receiving the grant. 

In fact, our dedication to documentation is itself in line with the move from the government to narrow the scope of eligibility to documented, science-based innovation. In recent years Calibre has helped a number of non-tech and non-medical businesses apply for the R&D grant successfully, including product retailers, motor vehicle parts businesses and manufacturers.

Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.

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