If you’re looking to take your business to the next level, don’t overlook the R&D Tax Incentive (R&DTI). You could be eligible without realising it. And if you think the admin and red tape required will make it hardly worth your while, think again. Contrary to urban legends about the R&DTI, applying isn’t onerous. And your chances of receiving a refund or tax offset aren’t a shot in the dark. Most eligible businesses would agree that lodging a claim is definitely worth it. So we’re taking a look at the R&DTI, and how you could use it to superpower your business. From how the incentive works and its benefits, to how to qualify and your options if your business isn’t eligible, we’ll help you find suitable, sustainable funding for your business.
A brief history of the R&DTI
The R&DTI is a Federal Government tax incentive. Launched in 2011, it has funded almost $24 billion in R&D.[1] Designed to support Australian companies to conduct R&D that they might not otherwise have undertaken, the R&DTI takes a two-pronged approach. It offers eligible businesses with an aggregated annual turnover of $20 million or less a tax refund on their eligible investment in R&D. And for companies with an aggregated annual turnover over $20 million, there are non-refundable tax offsets. Over the past 12 years, the R&DTI has had its ups and downs and undergone several reforms. The most recent reforms coincided with the beginning of FY22. They ushered in a $2 billion boost for the R&DTI, securing its future and bringing renewed certainty to claimants.
The global context
As a percentage of the Gross Domestic Product (GDP), Australia’s investment in R&D has been hovering around 1.8% for years. That’s well below the current Organisation for Economic Cooperation and Development (OECD) average of 2.7%.[2] Although Australia could do better, the R&DTI has and continues to play a pivotal role in R&D investment in Australia. But how does our R&DTI compare globally?
As part of Brevet Capital, Radium Capital belongs to a global R&D lending network. Our sister companies, for example, Easly in Canada, work with similar government R&D tax incentive schemes designed, like the R&DTI, to support R&D investment. So where does Australia rank, when compared to its OECD counterparts on government investment in R&D? The short answer is our government R&D spending, which includes the R&DTI, measures up pretty well. For FY21-22, Australian Government spending on R&D was 0.56% of GDP,[3] ahead of Canada which was 0.52% of GDP in 2021, but behind Hungary (0.64%), Czech Republic (0.65 %) and Austria (1.04%).[4]
Making a claim
Registering for the R&DTI and then lodging a claim is easier than it looks and only involves a few basic steps. To apply for the R&DTI, you first need to establish whether your business is eligible. Then you need to figure out whether you could receive the R&DTI refund or offset. After that, you can drill down to establish which of your R&D expenditures qualify.
Eligible entities
Your business is eligible to lodge an R&DTI claim if it’s an eligible entity. Under the rules, an eligible entity for R&DTI purposes is:
- incorporated under an Australian law
- incorporated under a foreign law but is an Australian resident for income tax purposes
- incorporated under a foreign law but is both a resident of a country that Australia has a double tax agreement with. The entity also needs to be carrying on business in Australia through a permanent establishment as defined by that double tax agreement. Also, the double tax agreement of the foreign country where the entity is incorporated must include a definition of permanent establishment.
Tax refund
If your business is an eligible entity with an aggregated annual turnover of $20 million or lower, you could receive a cash refund of 43.5 cents for every dollar you invest in R&D. There is no cap on the annual refund you can receive. But the minimum yearly R&D expenditure is $20,000 and the ceiling is $150 million.
Tax offset
If your business is an eligible entity with an aggregated annual turnover of more than $20 million, then you could be in line for a non-refundable R&D tax offset. The offset is calculated by taking your R&D expenses as a percentage of your company’s total expenses. This is called your R&D intensity. If your business has an R&D intensity of 0-2%, then the intensity premium for your R&D offset will be 8.5 percentage points above the company tax rate you pay. If your R&D intensity rate is 2% or more, the intensity premium for your R&D offset will be 16.5 percentage points above your company tax rate
Eligible expenses
Many businesses miss out on the R&DTI because they don’t realise they have eligible expenses. You don’t have to be a scientist in a lab doing blue-sky research to qualify. Businesses using R&D to improve existing products and services are eligible too. The incentive is industry agnostic and is available to any eligible business regardless of its size or stage.
Check out our article Company v. research project: are you eligible for the RDTI? for more information on R&DTI eligibility. And don’t hesitate to explore our article on record-keeping for your R&DTI claim, Contemporaneous records and the RDTI: what you need to know. It’s packed with pointers that will help your R&DTI registration and application go to plan.
Although the R&DTI is a self-assessment incentive, that doesn’t mean you can’t seek advice or assistance. Indeed, it’s a good idea to enlist expert advice and essential if you want to borrow against your R&DTI refund with R&D financing. For more information, read our article, Three golden rules for choosing an R&D tax consultant.
R&DTI: the benefits
There’s no doubt about it, the R&DTI is hugely beneficial to individual businesses and the wider Australian economy. Indeed, many of the innovations it funds, such as NeedleCalm’s solution for needle phobia or Catalina Genetics’ pioneering work in equine and cattle reproduction, are having a beneficial impact globally.
Government perspectives
Referring to the government’s spending on the R&DTI and what it achieves for Australia in the Science, Research and Innovation (SRI) Budget Tables 2022–23, The Hon Ed Husic MP, Minister for Industry and Science, said,
“We expect around $3.2 billion to be invested through the Research and Development Tax Incentive to help businesses to undertake research activities that otherwise would have not been undertaken.
“Science, research and innovation are fundamental to the government’s priorities, including rebuilding Australia’s manufacturing capability, supporting home-grown innovation, and securing our long-term productivity, energy security and prosperity.”
Industry insights
For individual businesses receiving the R&DTI, the incentive is equally instrumental in their success. Speaking with Radium Capital in November 2020, James Graham, Chief Executive Officer Recce Pharmaceuticals said,
“The R&D incentive helped keep our business going during our early development and has enabled us to take the risks necessary to build the globally focused business we are today.”
R&DTI: the limitations
For all its positives, the R&DTI has an Achilles heel. The time it takes for a business to register for the R&DTI and receive the refund can take up to 18 months. That’s a long time in cash flow terms and even longer in the world of innovation where speed to market is everything. But that’s where R&D financing comes in. It’s designed to bridge the cash flow gap that a company can experience while awaiting its tax refund.
How R&D financing works with the R&DTI
R&D financing is a specialised loan your company can apply for if it qualifies for the R&DTI refund. It’s usually secured against your venture’s expected R&D refund which more than repays the loan capital and interest when it arrives. R&D finance, such as a Radium Advance, allows businesses to access their pending R&DTI refunds early. And since a tax refund is effectively your company’s money, you’re free to reinvest it in more R&D or use the capital in other parts of your business. Radium Advances are uniquely flexible and scalable. You can adjust the loan amount and frequency to suit your business requirements. And the more you access and reinvest your R&DTI refund, the bigger your annual refund grows. So regular Radium Advances can offer strategic funding for your business and your R&D.
Radium Capital client and Juice Batteries Director and Chief Operating Officer Shane Meotti says, “Thanks to Radium Advances, we’ve avoided early dilution, brought forward our R&D on commercial applications by three years, and we’re developing the second generation of our residential battery system.”
To discover how Radium Advances have helped businesses doing R&D, read our client Success Stories. To learn more about the different ways you could use Radium Advances in your business, read our article, Funding your innovation Which R&D financing model suits your business goals?
Alternatives to the R&DTI and R&D financing
If you’ve previously dismissed the R&DTI, consider revisiting it. You may be eligible and not realise. And that’s why contacting our expert team could be transformative for your innovation. Ultimately, if it turns out you don’t qualify, it’s not the end of the road. From equity crowdfunding to peer-to-peer lending, there are a growing number of debt financing options open to businesses with innovation. And there’s equity funding too. Read our articles, How to leverage debt financing at every business stage and How to build the best R&D capital stack for your business to put your company on the front foot this year.
[1] Australian Government Department of Industry, Science and Resources. 2023. Science, research and innovation (SRI) budget tables 2022–23. [ONLINE] Available at: https://www.industry.gov.au/publications/science-research-and-innovation-sri-budget-tables-2022-23.
[2] The OECD. 2023. Research and development (R&D) – Gross domestic spending on R&D – OECD Data. [ONLINE] Available at: https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm.
[3] Science and Research – Parliament of Australia. 2023. Science and Research – Parliament of Australia. [ONLINE] Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview202223/ScienceResearch
[4] OECD. 2023. Main Science and Technology Indicators. [ONLINE] Available at: https://stats.oecd.org/Index.aspx?DataSetCode=MSTI_PUB#.