R&D Tax Incentive changes to investment in the future

Since the COVID-19 pandemic impacted our economy, we have seen three key trends emerge across Australian businesses. They have:

• made a clever pivot to products and services needed in response to the pandemic
• experienced a massive uptick in demand for existing products or services that have specifically solved problems created by the pandemic
• or, through no fault of their own, are experiencing serious financial stress and are struggling to remain solvent.

The central need for all businesses facing these challenges is capital. This applies to businesses that have made a pivot and now need to invest in their new approach to unlock further opportunities, to organisations that have seen a surge in demand now searching for ways to continue to capitalise on their new-found success, and to businesses that are struggling to remain solvent and are seeking capital to simply make it through the pandemic.

Access to capital is particularly challenging for pre-revenue start-ups that may have limited cash and so rely on third-party funding to keep going.

The good news is that the 2021 federal budget acknowledged that investment in research and development (R&D) is an important lever to help stimulate the economy. Prior to the budget, proposed amendments to the Research and Development Tax Incentive would have reduced the support provided by the program by $1.8 billion over four years. Industry had been lobbying for many years to prevent the government from making these changes on the basis that it was going to put a handbrake on R&D investment in Australia and, in some cases, force companies to go offshore to seek more support.

Fortunately, this budget confirms that government will invest heavily in developing sovereign capability across the research, manufacturing and energy sectors to help businesses grow. Importantly, assisting companies invest in R&D is no longer being viewed as a cost to treasury, but as an investment in our future. This is a welcome shift in attitude and will allow companies, including those from overseas, to view Australia as a viable location to undertake R&D activities, meaning more high-skill jobs, investment and growth in our economy.

The revised R&D Tax Incentive applies for years of income commencing on or after 1 July 2021. Companies with annual aggregated turnover of less than $20m will be able to access a refundable offset pegged at 18.5 percentage points above the corporate tax rate, which from 1 July 2021 will be 25 percent providing a 43.5 percent refundable tax offset. There will also be no cap on the refundable tax offset. Companies with an annual aggregated turnover of $20m or more will have a two-tiered R&D intensity (R&D spend compared to total business expense) framework providing a premium intensity benefit of 8.5 percent above the corporate tax rate for R&D intensities up to 2 percent, and 16.5 percent above the corporate tax rate for R&D intensities above 2 percent. Other application and compliance aspects of the current program continue in their present form, meaning companies can now enjoy a level of certainty regarding their future investment in R&D.

Of particular note, the government also announced as part of the budget its new Modern Manufacturing Strategy (MMS), a $1.5b program designed to strengthen Australia’s manufacturing capability across a range of key sectors. A number of funding streams will be available under the MMS, addressing issues such as supply chain resilience, manufacturing modernisation, collaboration, translation and integration.

This new funding announcement, combined with low interest rates and the instant asset write-off measures announced as part of the budget, should give manufacturing businesses greater confidence to consider investing in a wide range of growth activities, including R&D, if they take advantage of the support on offer. However, access to grant programs is likely to remain highly competitive.

It is always important to remember that accessing government funding needs to be approached in a strategic fashion. While programs like the R&D Tax Incentive are based on self-assessment, there are strict eligibility and compliance requirements that need to be met. AusIndustry and the Australian Tax Office (ATO) are active in enforcing these requirements by conducting reviews of claims that can go back a number of years. Both regulators have increased the level of transparency around their assessment frameworks so claimants should be more aware of particular risk areas and concerns for the regulators. However, when it comes to fast moving R&D programs, staying on top of the necessary detail can be challenging.

Grant programs, on the other hand, are merit based and typically highly competitive with many applicants seeking funds. They require a strong, whole-of-business investment case to be successful. Almost without doubt, businesses’ chance of success will be reduced if they are caught simply reacting to the announcement of a grant program for which they only have four to six weeks to prepare and lodge an application. Businesses need to be better prepared for what may be a significant financial request.

R&D Tax Incentive claims should be prepared on a real-time, concurrent basis to capture the right activity and costing information, at the right time. This allows for eligibility criteria to be addressed when it counts, so that businesses are not caught short when AusIndustry or the ATO conduct a review. During this challenging economic period, businesses can least afford to be repaying any of their previously claimed R&D benefits, so need to consider what their compliance obligations are.

Preparing a successful grant application requires a sound understanding of government policy as it relates to business, the industry sector or region in which a company operates. Government funding measures are designed to help facilitate particular policy outcomes. The task of preparing a strong application is therefore made much harder if a business does not understand or address the government’s priorities. It pays for a business to be well informed and appropriately prepared so that an application for funding presents a suitably targeted, fully developed and policy-aligned case for support. There are also many different funding options available which many businesses may not have the capacity to keep across. Businesses that are well prepared, and knowledgeable of desired outcomes, will face a better chance at success in accessing grants.

Learn more about the R&D Tax Incentive and government grants that are available for your sector.