R&D Tax Incentive: tips & traps for start-ups

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We’ve been to several start-up events lately where speakers have plugged the benefits of claiming large tax refunds for their development costs under the R&D Tax Incentive.  And over a few beers, I can’t count the number of times I’ve heard “we just claim our dev costs as R&D”.  Whilst the scheme is great for Australian start-ups, there are dangers in getting it wrong.  A couple months ago a Queensland IT company had their R&D claim rejected and that company is now in administration - a brutal lesson indeed.

If you qualify (and keep onerous records!) the R&D Tax Incentive is great.  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!  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 - and it’s a big but - a project that develops 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 an actual 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.

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.

Happy experimenting!