Many family businesses in Perth are doing incredible work. And it is great to know that the research and development tax incentive or the research and development tax offset are specifically designed to assist these family owned businesses in Perth.
How much is the R&D Incentive worth?
In effect: if you turnover less than $20m you will enjoy 43.5% of the cost back as a tax refund. This comes as a cash refund to most businesses doing start up innovative work and it is an incredible benefit.
New Perth Start Up Pty Ltd spends $800k on costs that qualify for the R&D TaxOffset. So the government will give the company $348,000 as a tax refund when they lodge their tax return.
New Perth Start Up Pty Ltd spends $100k on costs that do not qualify for the R&D TaxOffset. So the company will have a tax loss of $800k that is carried forward. When the company eventually makes a profit (say in 7 years time) the tax liability at that time will be reduced by $220,000.
If your turnover exceeds $20m (and many family owned business in Perth do exceed this threshold) you will enjoy a 38.5% tax offset. The tax offset can be offset against future tax liabilities.
Is the incentive a permanent benefit?
If you enjoy the R&D incentive you will pay less tax. And the lower tax paid will result in lower franking credits (you should read up on how franking credits work).
So ultimately the lower franking credits will result in fewer franked dividends paid by the company to the family that owns the business.
So no. It is not a permanent benefit. However it is important to note that many families operating R&D businesses are very tight on capital – enjoying a tax benefit now at the cost of paying tax many years later (when profitable) is a very appealing option.
How do I register?
It is important to note that the registration for the offset or grant is self-assessed. However to achieve that process you need to register with the Department of Industry Innovation and Science (and AusIndustry in particular).
And if you do register you must do so within 10 months after the end of your income tax year.
The interesting point to note at this stage is that the matter is initially dealt with a government agency that is not The Australian Taxation Office. And AusIndustry is particularly helpful in educating and helping family businesses understand what can be claimed and helping with the compliance.
This is an important point. Before you pay expensive consultants to help you with the R&D incentive focus on getting as much help to bring your business upto speed. And given that the grant is actually self-assessed we, as a practice, struggle to see why most R&D consultants are charging fees as a “percentage”.
If you are paying a fixed flat fee to a person you are dealing with an advisor. If you are paying a percentage based fee: you have a salesperson.
Am I eligible?
To be eligible for the R&D grant your family business needs to be:
- A trading company;
- Spending more than $20k on
- Core R&D activities.
What is a core R&D activity?
To qualify for the tax concession your family business must be spending money on activities:
- Whose outcome cannot be determined in advance; and
- Can only be gained by a systemative progression of work; and
- Is conducted for the purpose of generating new knowledge.
If you have a core activity you can also include activities that are supporting R&D activities.
Payments for interest and the cost of acquiring land and buildings cannot be part of your R&D activities for grant purposes.
It is important to note that these items must be documented. However in our experience most family businesses do document and note the technical R&D work. No family will say to a high value employee “go have a think about X and come back in 12 months-time and show us what you have”.
The detailed workings and technical detail drawn up by the people doing R&D work is often more than sufficient to evidence what is happening. The paid consultants should only be, at the most, compiling these documents into a logical way.
Further, the Tax Office requires that family businesses retained records sufficient to verify the amount of the expenditure incurred on R&D activities, the nature of the R&D activities and the relationship of the expenditure to the activities” (https://tinyurl.com/y7x2jhp5) Retaining these records is crucial as you do not want to be reconstructing lost tax documents in the event of a review.
The Ausindustry Review Process
If Ausindustry do review your claim this should not be a cause for concern (expecially if they have been engaged early on). It typically starts with a “Request for Information” and it may be followed by a site visit.
The ATO Review Process
The R&D tax incentive is claimed through your tax return. So your tax agent must be fluent in this area of law as they are responsible for the management and administration of the R&D claim as the first point of contact.
Once the claim is made the ATO might undertake a review through a specific review, a comprehensive risk review (as part of a larger review) or a risk review.
What other grants can I enjoy?
If you are an innovative new family business in Perth there are a raft of taxation incentives available. An advisor who is across the issues in emerging families in business can help you progress in this area.
A final word
The R&D grant, sadly, has seen many Perth accountants charging success fees for the amount of the grant enjoyed. And this is difficult to reconcile as the grant is effectively self-assessed and is often challenged well after the advisor has been paid.
At Westcourt we have helped many families understand and structure the grant effectively through collaboration with Ausindustry. And the fees we charge are not based on the amount of your refund so we are not encouraged to “overclaim” the grant and risk the family to expensive litigation afterwards.