Driving Innovation With The R & D Tax Incentive
We know that innovation requires significant investment in Research and Development (R&D) and it’s not only scientists driving the innovation. There are currently around 10,000 companies Australia wide claiming a cash refund through the Federal Governments R&D Tax Incentive.
A company should seek advice from their accounting firm as to whether they are eligible for the R&D tax incentive and they will need to register their R&D with the Department of Industry, Innovation and Science within 10 months after the end of their company’s income year. While the program is well known in the startup space, it is still surprising the number of companies not aware there is a Government refund available for their R&D investment.
One such company which has benefited from the R & D Tax Incentive is Tap into Safety – an early stage business in the preventative and interactive Health and Safety and Mental Health space. After noticing a gap in the market, the company developed a customised, interactive health and safety training platform which teaches and tests safety knowledge, hazard awareness, and mental health and wellbeing strategies.
The company’s two software solutions – ‘Hazard Insight’ and ‘All of Me’ – combine interactive technology with modern learning practices to produce a methodology focused on the individual’s workplace.
Since its inception Tap into Safety has been taking advantage of the Federal Government’s R&D Tax Incentive to develop and commercialise its products. Tap into Safety Director and CEO Dr Bahn described the Federal Government scheme as ‘phenomenal’ for incentivising innovation, but said the lag time between expenditure and refund penalised smaller companies with limited or no cash-flow.
This is where R&D advances are helping to accelerate innovation, by solving critical cash flow issues often seen in small innovation companies and a problem the industry has highlighted. In 2016 an independent review of the R&D Tax Incentive recommended quarterly payments however the Government hasn’t been prepared to deliver on this recommendation. A R&D advance is a quarterly advance based on eligible R&D expenditure in the preceding quarter, for up to 80% of the expected refund from eligible R&D expenditure – it is a private sector solution to an industry wide issue.
“Ultimately a key reason industry was calling for quarterly refunds, and why R&D advances is such a good product, is to avoid the need to raise too much capital too early,” Dr Bahn said. “An R&D advance has meant we did not have to raise capital, and give away value, earlier than we wanted to. Early in a company’s life you prefer not to raise, and rely on grants, rebates and the three ‘Fs’ – family, friends and fools. You don’t want to raise too much until you have built a solid platform and some consistent revenue, otherwise you end up with a ‘Shark Tank’ scenario where you’ve given away control of the company for a few hundred thousand dollars before your idea takes off.”
Rather than waiting up to 18 months to get a lump sum R&D advances provide a quarterly refund advance on money spent in the previous three months and that money can be reinvested straight back into further R&D. For a small company, this has a massive impact on cash flow and total working capital requirements.
There are thousands and thousands of innovative companies answering the Government’s call for us to be an ‘innovation nation’, but most undertaking this R&D are companies which don’t have a lot of, if any, revenue or access to pools of working capital.