There are pitfalls for startups in the federal government’s R&D offset scheme for applicants who are planning to bootstrap their business from revenue and believe they will get back the maximum rebate from the tax office.
While the headline rebate rate is 45 per cent, it ain’t necessarily so that every applicant for the R&D offset will score that rate, according to PWC’s Marcus Tierney who is a partner with the firm working in the government grants and R&D incentives team.
“The part that a lot of people don’t communicate around the R&D tax offset for small companies, those making less than $20 million, is that the benefit is somewhere between a minimum of fifteen cents in the dollar and a maximum of 45 cents in the dollar.”
Mr Tierney said he spoke to companies every day that did not understand the program or were unaware they were entitled to it.
Mr Tierney outlined how the benefit works in practice. If a company made one million in revenue and spent $800,000 on development that would, without the offset and any other expenses, generate a tax bill of $60,000 under the 30 per cent corporate tax rate ($1,000,000 -$800,000 = $200,000 profit, taxed at 30 per cent).
To calculate the benefit of the R&D offset, you take the amount of tax payable on the full revenue amount which is 30 per cent of $1 million which equals $300,000 and offset it against 45 per cent of the $800,000 in development costs. This gives a figure of a $60,000 refund which is 15 per cent of the $800,000 development costs.
In another scenario, if a company spent $1 million in development and made $800,000 in revenue and claimed the R&D offset, it would generate a refund that was 21 percent of the development costs.
Lastly, if our fictional company had just spent $800,000 in development and not made any revenue it would have got back the entire 45 per cent rebate, that is $360,000.
So, is this tax treatment unfair on startups that try and bootstrap from revenue compared to those with the luxury of having enough in venture funds to develop products without needing to generate revenue along the way?
Some say so.
Paul Cheever, Chief Executive of the Australian Institute for Innovation says some startups he has spoken to feel the way the rebate is structured is a deterrent to putting in the effort to generate revenue in the early stages or resorting to structures and practices designed to maximise the rebate.
“They say it’s a disincentive to bootstrapping your business,” says Mr Cheever.
However, Mr Tierney argues the system is fair in that it designed to give the maximum benefit to companies making larger losses in the early, cash-burn intensive phase of their existence.
“It’s a fairly elegant policy. Fifteen per cent benefit is good, but everyone would like to get the forty-five percent.”
He says the R&D offset is just one of the incentives available to support companies in the early stage, such as the crowd funding option.
“There’s a range of other things that are there on top of the R&D offset.”
Mr Tierney offered a number of tips to those looking to make use of the R&D offset.
Don’t use a trust structure if you want the benefit, as trusts are ineligible.
“There are so many companies doing great things that can’t get access to the program because they in a trust,” says Mr Tierney.
Make sure that development costs are well documented and be aware that using state or federal government research grants can preclude you from getting the R&D offset.
“There’s a rule that says you can’t double dip if you have grants and also get the R&D offset,” says Mr Tierney.
Finally, PWC offers an online tool called Nifty R&D to help startups with their R&D tax incentive applications.