R&D Tax Incentive: the role of SMEs in progress and innovation

//R&D Tax Incentive: the role of SMEs in progress and innovation

Australian startups are usually well aware of the Federal Government’s R&D tax incentive scheme, however, their SME counterparts utilise this incentive far less often. Overall, Australia is well below the OECD average in terms of R&D investment, with recent ABS estimates placing our expenditure at just 1.01% of GDP. In comparison, average business R&D expenditure among OECD countries was last measured at approximately 2.3% of GDP.

R&D expenditure has been falling in Australia over the past 10 years (it peaked in 2008 at 2.2% of GDP). In part, this has been due to the mining downturn, but was also certainly affected by the GFC and subsequent global economic uncertainty. However, this doesn’t mean that Australia is destined to continue along a path of low R&D investment. SMEs in Australia already tap into the R&D tax incentive, but there is certainly further room for growth in this area. If you are an SME conducting innovative R&D in order to solve market problems, improve efficiency or grow your business, or if you are considering future R&D activities but are apprehensive about risk, you should explore the options under the existing R&D tax scheme to ensure appropriate support for your business.

Where is your business going?

Whether you are a startup, SME or large enterprise, you will continue to face strong competitive pressure and the risk of disruption. As a result, you must adapt your business practices and technology appropriately to maintain your relevance. To do this, businesses must have a healthy knowledge of their customers and market, and craft a vision for the future of their operations which aligns to a growth strategy that is flexible and adaptable enough to deal with a rapidly changing external environment.

To remain viable in the marketplace, SMEs in particular must focus on adapting their business model to anticipate and evolve with their market, as well as pushing the envelope with their products and services. This is where active R&D comes in, as innovation is one of the key ways to differentiate your business amongst a sea of competitors. Investing heavily in R&D can appear risky for SMEs, but it’s important to identify that, often, the biggest risk is not taking risk. Ultimately, the alternative to investing in R&D and evolving your operations is usually a slow decline into irrelevance.

The importance of R&D in innovation

We are living in the most prosperous time in human history, yet many of us take for granted the products, services and healthcare which we have access to in Australia. In order to continually improve our quality of life and betterment of society, we must rely on businesses conducting R&D to steer us in the right direction and spur development.

Australia has a rich pool of talent which exists within SMEs across the country. However, as opposed to large companies who have the balance sheet strength to invest in R&D, SMEs are more reluctant to take on that risk if there is no ‘safety net’ to fall back on. To make sure that Australian SMEs are reaching their potential in terms of R&D and innovation, they must:

  1. Connect their growth strategy with an innovative business model – see Are you paying your business model enough attention? for further information
  2. Actively pursue R&D activities to drive innovation and build productive capacity
  3. Check eligibility for the tax incentive and consult with relevant advisors to ensure appropriate compliance and risk management
  4. Realise the tax benefit for R&D activities conducted, including 43.5% cashback offset for companies bringing in less than $20 million.

Is your business conducting experimental activities?

To be eligible for the tax incentive, relevant experimentation must be undertaken onshore in Australia, and the outcome of the experimentation cannot be known prior to conducting the R&D. Experimentation includes starting novel activities or developing new technology in order to improve your products, services and business processes. Many businesses are actively engaging in R&D without realising it; thus, failing to take advantage of the tax incentive readily on offer.

A common misconception is that the R&D tax incentive is primarily directed towards the  manufacturing, scientific research and resources sectors, so many SMEs don’t think to look into their own eligibility. Whilst it is true that a majority of R&D-related activity is claimed by manufacturing and scientific research companies, the rise of technology and app development means that a plethora of SMEs improving their own offerings are conducting eligible R&D activities without claiming any tax offset for this work. If this sounds like your business, make sure you check your eligibility for the R&D tax incentive and factor the potential savings into next FY’s budget.

Nina Burrows is a Consultant at Chrysalis Advisory

Chrysalis Advisory provides advisory services in strategy, leadership, culture and business development to support high growth ventures, transformation in existing businesses and outcomes in for purpose organisations. If you would like to discuss how we can support you to grow, transform and consider your business model please visit our website www.chrysalisadvisory.com.au or contact me at nina@chrysalisadvisory.com.au

2018-06-05T01:29:00+00:00June, 5th 2018|