If your business is eligible for the R&D tax incentive (RDTI) refund, the success of your claim will hinge on whether your R&D is a company project or a research project. Businesses must meet AusIndustry’s strict eligibility criteria to access the RDTI scheme. And that means not all research is equal. So how do you know whether your R&D will cut the mustard and qualify? To help you decide whether to apply for the RDTI, we’ve put together a simple checklist that you can use to size up your business and projects. But before we dive into that, let’s pause and consider what the RDTI is and what it can do for your business.
What is the RDTI?
The RDTI is a Federal Government tax incentive designed to encourage Australian businesses to undertake R&D that they might not otherwise have conducted. The RDTI has two different incentive streams.
From 1 July 2021, eligible companies with eligible R&D and an aggregated annual turnover of less than $20 million can claim a tax refund equal to the rate of company tax they’re paying, plus an 18.5 percentage point premium. This is equivalent to the 43.5 cents for every R&D dollar that was in place prior to the changes to the RDTI taking effect.
Eligible companies with an aggregated annual turnover of more than $20 million can receive a non-refundable tax offset. As of 1 July 2021 a new two-tiered R&D intensity system will come into play. The R&D intensity rate is calculated using R&D expenses as a percentage of the company’s total expenses. Businesses with an R&D intensity of 0-2% have an intensity premium of 8.5 percentage points above their company tax rate, while businesses with an R&D intensity rate of 2% or more, receive a 16.5 percentage point premium above their company tax rate.
The key takeaway here is if your business is eligible for the refundable tax offset, then your R&D could receive a cash injection that helps cover more than 40% of your R&D capital outlay.
One of the guiding principles of the RDTI is that it is a self-assessment incentive. So you need to assess your company’s R&D against the government requirements. This doesn’t bar you from seeking expert advice from an R&D tax consultant. Indeed we highly recommend you do. Check out our blog on choosing the right expert adviser for your business: Three golden rules for choosing an R&D tax consultant. But ultimately, the onus is on you and your business to ensure your RDTI registration and claim are correct.
There are three components to RDTI eligibility. You’ll need to consider each of these carefully before you register your R&D with AusIndustry and lodge a claim.
- Is your business an eligible entity for the RDTI?
- Are your R&D activities eligible under the RDTI?
- Is your R&D expenditure eligible under the RDTI?
Step 1: Find out if your business is an eligible entity
Before you start assessing whether your research meets the cut, consider whether your business is an eligible entity. Don’t be tempted to skip over this important first step otherwise, you risk never getting out of the starting blocks with your RDTI claim.
Under the rules, your business is an eligible entity if it is:
- incorporated under an Australian law
- incorporated under a foreign law but an Australian resident for income tax purposes
- incorporated under a foreign law, but is both a resident of a country with which Australia has a double tax agreement and is carrying on business in Australia through a permanent establishment as defined by the double tax agreement. The double tax agreement of the foreign country where the entity is incorporated must include a definition of permanent establishment.
If you are an individual, a corporate limited partnership, exempt from tax or a trust, then you are not an eligible entity for RDTI purposes.
Step 2: Find out if your R&D activities are eligible
Working out what qualifies as R&D activities can trip up many businesses. Some organisations don’t have the RDTI on their radar because they mistakenly think their R&D must be blue-sky or relentlessly pushing back the boundaries of science. On the flip side, some companies think they can dress up their business-as-usual projects. In reality, both fundamental research and R&D to improve existing products and services can quality if they tick these boxes:
- your R&D activity is core research based on the principles of science
- your core research uses proper scientific methods and creates new knowledge through the process of hypothesis, experimentation, observation and evaluation
- your R&D can be a supporting R&D activity that you’re undertaking to advance your core research
Under the rules, your business must have at least one core R&D activity. You must specify any supporting R&D activities you register and claim against, and these must directly support your core R&D.
Step 3: Understand which R&D activities are excluded from core R&D
It’s crucial to note at this juncture that some activities are excluded from the definition of core R&D. Understanding what is and isn’t deemed core R&D is the crux of what makes your project a research project or just another company project. Detailed definitions are available from the AusIndustry website. But here is a whistle-stop tour of which types of R&D are off-limits for core research.
- Market research
- Prospecting, exploring or drilling for minerals or petroleum, in particular for discovering deposits, determining more precisely the location, size or quality of deposits
- Management studies or efficiency surveys
- Social sciences, arts or humanities research
- Commercial, legal and administrative aspects of patenting, licensing or other activities
- Activities associated with complying with statutory requirements or standards
- Any activity related to the reproduction of a commercial product or process
- Developing, modifying or customising computer software mainly used in internal administration
It’s worth noting that the RDTI rules for software development are being reviewed after the government unveiled new draft guidelines for software claims in May 2021.
It’s also noteworthy that while this excluded research doesn’t constitute core research, it may still count as a supporting research activity.
Step 4: Registering your R&D and lodging your RDTI claim
If your business is an eligible entity and your research meets the criteria for eligible R&D, congratulations! You can register your research with AusIndustry. Providing you spend a minimum of $20,000 in eligible R&D, you’ll be able to claim an RDTI tax offset on your eligible research expenditure or eligible notional deductions, as they are also called. The Australian Tax Office (ATO) has information on what is and isn’t eligible expenditure and how much you can claim. Once you’ve ticked all the boxes for registering your research, don’t forget to keep records for your RDTI claim. The ATO expects you to maintain contemporaneous records. These are records of your activities around the time you plan and conduct your research to support your RDTI activities. The AusIndustry website offers detailed examples of the records you need to keep for both core and supporting research activities.
Don’t wait for your tax refund
Once you’ve registered your research, you will need to wait until the end of the income year to lodge your claim, then wait for your refund to arrive. This can take up to 18 months from the date of your R&D expenditure. Why wait months for money that you’re owed? Your R&D and your business would benefit if you could access your refund now. And the good news is, you can. At Radium Capital, we provide R&D financing called Radium Advances. Radium Advances are a cost-effective, non-dilutionary, cash-flow friendly way to access your R&D refund whenever it suits you during the year. Whatever your industry sector and loan requirements, there is every chance we can help you access the capital you need within a few business days.* So why not schedule a call with one of our expert advisers, or get the ball rolling with your Radium Advance application now?
*Radium Advances can be approved within two business days if all application documentation is received and correct. **Radium Capital is a specialist R&D financier. In assessing your eligibility and preparing your RDTI claim, we recommend you seek the advice of an R&D tax consultant.