Major cashflow boost for small companies from the new R&D Tax Credit

Alchemy Equities, an expert in small business finance, asked Gerry Frittmann – Managing Director of TCF Services, a leading industry specialist in R&D Tax Credit and government grants for small business, to update us on the changes to the Australian R&D Tax Credit program.

Tax Status ($1m)

While claimants with grouped turnover over $20m will receive a non-refundable Tax Credit equivalent to a 10% net benefit, up from 7.5% under the current scheme, the R&D Tax Credit has come down squarely aimed at fostering an increase in R&D for smaller companies. Of course, the king’s largesse is rarely extended without an increase in the complexity of the rules and regulations.

In this case, there is a change in the definition of R&D; a split between Core and Supporting R&D, and a dominant purpose test which will qualify or disqualify the Supporting activities and their cost.

Core R&D activities are defined as experimental activities:

•             whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:

–             is based on principles of established science; and                                                 –             proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions;  and

•             that are conducted for the purpose of acquiring new knowledge concerning the creation of new or improved materials, products, devices, processes or services.

 New definition of Supporting R&D activities

This imposes a dominant purpose test whereby supporting activities whose dominant purpose is to support the Core R&D will be eligible, while activities undertaken for production purposes OR future commercial benefit will be excluded. The R&D Tax Credit is not intended to cross-subsidise commercial activities so the dominant purpose test is designed to reduce claims for expenditures that do not impose an additional cost on the company arising from R&D activities.  

Intending claimants need to rigorously assess themselves against a new range of eligibility criteria and internal capabilities. These include their entity structure, ownership and grouped turnover; the division of their R&D activities between the newly defined Core and Supporting activities;  the application of the new dominant purpose test;  their ability to meet the new record keeping obligations and track labour and material expenses as they go, and their individual tax status. Those who can create a system that meets the new benchmark will be given the option of claiming their Tax Credits quarterly from January 2014. Companies who wish to maximise their return and ensure their compliance will adopt more reliable management processes than they have under the R&D Tax Concession, and forward looking claimants, will be setting themselves up to track as they go so they can claim early and reap the rewards.

Turnover $5-20mil

The biggest winners from the new R&D Tax Credit are R&D intensive companies with grouped turnover between $5 – 20m who are in tax loss.  For the past ten years they have been unable to claim the R&D Tax Offset and receive the 37.5% rebate because their turnover has been over $5m. Faced with the option of receiving the 7.5% Tax Concession and adding to their tax losses, most have declined to claim. Now under the new R&D Tax Credit they will receive a 45% refundable tax credit net of any other tax liabilities delivered in cash, creating new sources of cash-flow for R&D rather than marginal increases in tax loss.

For further information on how you can help maximise the return and minimise the fuss contact the NSW Innovation Advisory Service.