Have you ever been to a start-up gig where someone plugs the benefits of claiming tax refunds for their development costs under the R&D Tax Incentive? I have, many times. And if I had a dollar for every time I’d heard “we just claim our dev costs as R&D” I’d be far from rich, but I could shout you (another) boutique cider. Whilst the scheme can be great for Australian start-ups, there are dangers in getting it wrong. Several months ago a Queensland IT company had their R&D claim rejected and that company went into administration – a brutal lesson indeed.
How it works
If you qualify (and keep onerous records!) the R&D Tax Incentive can be very handy. If you spend $20K or more on R&D and your company has a tax loss, chances are you’ll get a refund of 45c for every dollar spent on R&D; so spend $20,000 and get back $9,000 – ka-ching! And from next year, you’ll be able to access the refund quarterly and not have to wait until tax time. There’s no limit on the amount of R&D spend, so the sky’s the limit.
Documenting your method and maintaining records for years on end (through office moves, staff turnover, new filing systems etc) is critical
But wait, there’s (unfortunately) more to it
But, and it’s a big but, developing a new product or service is not necessarily R&D – it has to involve both innovation and technical risk. They are experimental activities that follow a ‘scientific method’ to generate new knowledge. And documenting that method, like a scientist would, and maintaining those records for years on end (through office moves, staff turnover, new filing systems etc) is critical. If it’s not written down, it didn’t happen.
What about my ‘dev’ costs?
There are some specific rules around IT development costs too, which means that if it’s developed for internal business admin, it won’t be a ‘core’ R&D activity. It might still fall under ‘supporting’ R&D, but then we get into details.
To see if your activities qualify, check out this great tool, and even if you pass with flying colours, you can ask AusIndustry for an ‘Advance Finding’ on whether your activities will qualify. This is a binding decision on the Innovation Australia Board and the ATO, so it’s great for peace of mind for you and potential investors.