Missed opportunity in R&D incentive

Many small businesses may be unaware they already have access to a major tax incentive to fund research, in addition to the federal government’s new innovation package.

Eligible businesses in Western Australia could be missing out on the full benefits of the federal research and development tax incentive, with hospitality providers and agribusinesses among those who underuse the scheme.

The R&D tax scheme was introduced by the Hawke government in 1986, and provides a refundable tax offset of up to 45 per cent of the value of research and development spending, although the maximum rate is to be reduced to 43.5 per cent in line with a reduction in small business tax rates.

Bentleys tax and business services director Fab Fanayan said the incentive was surprisingly undersubscribed, with only 13,600 companies out of around 2 million entities nationally utilising the scheme.

About 13 per cent of those 13,000-plus firms were in WA.

Companies with turnover of more than $20 million receive a non-refundable credit.

“If you go back to what people think R&D involves, it’s people with white lab coats doing science experiments,” Mr Fanayan said.

“For the majority of businesses … they do (this) in different aspects, smaller aspects.

“Not necessarily as scientific.

“But developing that product and service is something they’re conducting that they deem as their normal business progression.”

He said the incentive was a good way to improve and streamline cash flow.

Examples of businesses where there could be stronger take up included restaurants, Mr Fanayan said, which could potentially claim for developing and testing recipes for commercial production.

In agribusiness, new lines of produce and work on drought resistance could be covered by the credit, while in manufacturing, synthetic coatings for processes and weather resistance could be included.

RSM Australia R&D tax director Stephen Carroll said he regularly met business owners who were eligible, but had failed to use the incentive.

“(The) mining services industry is commonly missing out,” Mr Carroll told Business News.

“These are often small to medium private businesses … that have to continue to advance their existing service or create new solutions and technologies.”

Mr Carroll said companies in the sector that were innovating due to the downturn would probably find they were undertaking activities that would qualify for the scheme.

Potential claimants would need to ensure they were fully aware of the types of costs they could claim that related to R&D so they didn’t over claim. They must also maintain appropriate records of the experiments, and ensure that they met the requirements for new knowledge, he said.

That means that the ‘knowledge’ is not available in the public arena on a reasonably accessible basis at the time the activities were conducted, according to Ausindustry, part of the federal Department of Industry, Innovation and Science.

A further point is that companies don’t need to be profitable to claim the credit, according to Mr Carroll.

“A common misconception is that companies that are not ‘tax payable’ assume that R&D tax (credit) is not for them,” he said.

“This is completely wrong.

“It provides a great cash benefit to companies in tax losses.”

Impact

More than $18 billion of R&D expenditure was registered for 2013-14 nationally, according to the Australian Taxation Office.

About five in every six registrations were for companies with turnovers below $20 million annually, with 40 per cent in the services sector, 32 per cent manufacturing and 3.7 per cent agriculture and related industries.

Mr Carroll said the incentive was valuable to the WA economy and job creation.

“We have many examples of companies going through growth cycles and new product developments that have leveraged the R&D (incentive) and have come out with more sales and stronger businesses,” he said.

Additionally, companies were more likely to conduct research here, where they could access the credit, rather than overseas, which he said reduced the net cost of the program.

The tax credit system is being reviewed as part of the federal government’s tax white paper process, while Business News reported in December that more than 80 per cent of the government’s spend on R&D is through the tax incentive, according to the OECD.

That was the second highest reliance on tax incentives among member nations, which generally use direct means such as grants to support R&D.

The recent federal National Innovation and Science Agenda relies more heavily on direct funding packages, however, such as for research translation and industry collaboration.