Am I making the most of government funding?

gOVERNMENT FUNDING

It may come as a surprise to some, that the government provides a significant amount of funding and support through grants and incentive programs. In fact, over 700 programs, offering $50 billion of government funds are available at state and federal level. Many businesses simply do not know where to start, or have the time to trawl through all of the programs available. To make matters worst, grant programs are constantly changing and have opening and closing dates.

So where do you start?

FIRST,

be aware of some of the entitlement/incentive programs which are well established, and highly accessed such as:

• The R&D Tax Incentive (administered by AusIndustry and the ATO, currently running at $2.5b)

  • It aims to encourage industry investment in research and development (R&D).

  • It provides businesses undertaking R&D activities with an additional tax benefit. This can be refundable for up to 45% of the expenditure relating to R&D activities. More on this here.
    

• The Export Market Development Grant (known as EMDG) (administered by Austrade, estimated total funding pool of $175m)

  • It aims to encourage small and medium Australian businesses to develop export markets.

  • It reimburses up to 50% of eligible export promotion expenses above $5K up to $150K. It can be accessed up to 8 times, although performance measures apply after the first application. More on this here.

SECOND,

investigate grants and incentives that will align to your business strategy, rather than changing your strategy to suit. Talk to government, advisors, and carry out your own searches via websites such as the government's Grant Finder, and GrantGuru which is free to access.

For example, at a state level: 

• If you are just starting a business in Melbourne there are the Melbourne City Start Up and Business Expansion Grants ($300k budget). These can be used to fund establishment costs. More on this here.

• There are also several grants available through Business Victoria, click here.

At a federal level, the government's flagship program to improve business competitiveness and productivity is the Entrepreneurs Infrastructure Program. It offers three streams with one of the most attractive being:

• Accelerating Commercialisation (administered by AusIndustry, estimated at $30m)

  • It aims to assist with funding the costs associated with bringing novel products, processes and services to the market.

  • The maximum grant is $1M so based on the requirement for 50:50 funding, projects up to $2M can be considered. More on this here.

There are many other grant programs out there, however, those discussed above should serve as the best starting point. 

THE FINE PRINT:

The R&D Tax Incentive provides more short term certainty of funding being received, however, companies are audited retrospectively by AusIndustry and/or the ATO. Record keeping is important. This program is often misunderstood, and companies often: miss out on entitlements, attract audit attention, and overlook complex legislative provisions, which may deem them not eligible, or significantly restrict the benefit which can be accessed.

Grant money is not free money. Considerable time is involved in compiling a grant application, and there is no guarantee that there will be a successful outcome. Grants typically require you to match the funding you seek, provide funding that is assessable income, and must be spent in accordance with terms and conditions.

The general rule with government funding is no double dipping on the same dollar of expenditure. 

A PICTURE SPEAKS A THOUSAND WORDS,

so here is one that shows how accessing government funding programs can be done from business inception, through to various phases:

KEY TAKEAWAYS:

• Awareness - Awareness and developing a grants and incentives strategy which aligns to your business strategy and direction is key. For example, you may wish to develop a calendar which tracks upcoming grants and entitlement programs which you are considering for the next 12 months. Leverage consultants and free search websites to assist you.

• Assessment - Research and understand how a particular program operates. Critically assess its criteria and how you will be able to mount a compelling case. Try to gauge the effort required to access versus the benefit.

• Ability - You will need to make a convincing case about why you should receive funding, recognise if you have the skills and time required to do this yourself. Engage experts as required.

Talk to us today about how we can help you access government incentives and grant programs such as those outlined above.

Evidencing your R&D claim

RECORD KEEPING

As the old saying goes, you don't get something for nothing.

Many companies accessing the R&D Tax Incentive often overlook one of the critical aspects of making a claim; record keeping.

So what is adequate record keeping for an R&D claim? What will put you in a strong position whilst minimising internal disruption? 

AusIndustry and the ATO both view record keeping as an important part of any R&D project and also an important part of good business practice. If you register for the R&D Tax Incentive you need to keep records to demonstrate the work you register is eligible for support.

Not having adequate records to evidence the work undertaken and expenses incurred may result in a claim being dismissed and the company required to payback the benefit it has accessed over a number of years.

There are two types of record keeping required for the R&D Tax Incentive:

1. ACTIVITY BASED RECORD KEEPING

Activity based records show that activities were actually carried out, and show how they are eligible core or supporting R&D activities.

The type of records that might be kept for activity based records include:

• Notes from meetings with project and technical staff.

• Business plans and approvals.

• Results of background research and scoping.

• Technical project documents, including the results of testing on the product, idea or service.

• File notations and updated records to track the progress of an R&D activity.

2. EXPENDITURE BASED RECORD KEEPING

Expenditure based records justify expenditure claims for eligible R&D activities.

The type of records that might be kept for expenditure based records include:

• Timesheets to verify the amount of time spent on R&D activities.

• General ledger entries and invoices to verify the amount incurred on R&D activities and that include sufficient detail to link them to the R&D activities.

• Spreadsheet or template that allows for eligible R&D costs to be consolidated into a format that allows for direct input into the ATO R&D Tax Incentive Schedule.

• Financial documents including records of expenditure that include sufficient detail to link them to the R&D activities.

HERE ARE OUR TIPS ON IMPROVING R&D RECORD KEEPING:

• Hold prospective discussions with a specialist R&D Tax advisor to identify the key opportunities for the year ahead.

• Capture staff time spent on the project, key role and tasks at least on a monthly basis. For software development staff, development tracking systems such as GitHub may serve well.

• Ensure any contractor invoices reference the work undertaken as R&D, or supporting R&D.

• Capture significant technical unknowns which will require experimentation, from the outset and throughout the project.

• Capture any failed test outcomes, test procedures, and resulting design changes.

IF YOU ARE CONCERNED THAT YOUR R&D CLAIM RECORD KEEPING MAY NOT BE UP TO SCRATCH, CONTACT US TODAY FOR A NO OBLIGATION DISCUSSION.

What is R&D?

rESEARCH AND DEVELOPMENT

Outside of the R&D Tax Incentive definition, it is worthwhile considering the concept of Research and Development (R&D), and associated literature. 

This article I came across from http://toolkit.smallbiz.nsw.gov.au/part/14/72/305 resonated with me. I found a lot of parallels with the R&D Tax Incentive definition.

"R&D plays a key role in the innovation process for many organisations. Research is a systematic approach to gaining new knowledge or building a better understanding of concepts. Development is the process of applying and using the research and knowledge to generate new ideas that can be applied in the market.

In the past, and to some extent still today, research and development has been used to overcome genuine technological problems. Technological problems are the issues that prevent you from taking an idea any further. For example, an employee in the past may have suggested an idea for a mobile telephone, however, at the time the facilities and technology may not have been possible to allow the product to be developed for the market. Over a period of time, research and development makes these types of ideas possible.

Research and development involved four key operations; basic research, applied research, development and technical service. Basic research generally involves fundamental activities that provide information and data to a wide group of people. Basic research is conducted mainly in laboratories and universities funded by government grants or private investment. Applied research involves the application of previously existing principles to solve specific problems, often resulting in new technology.

Development is an activity similar to applied research, using established principles and focusing them on new products and ideas. It involves overcoming technical problems and making the product a viable option. Technical service focuses on improving the efficiency and effectiveness of current products, processes and systems.

Research and development plays an important part in gaining a competitive advantage. Without investing in some form of R&D, you are relying on others to come up with new ideas, new products and new technology. This puts your organisation at a disadvantage as you are forever playing catch up with your competition, merely copying what works and not being innovative."

DO YOU AGREE?

THE R&D TAX INCENTIVE DEFINITION OF R&D IS REPRESENTED AS FOLLOWS:

View fullsize

TALK TO US TODAY ABOUT WHETHER YOU ARE UNDERTAKING R&D UNDER THE R&D TAX INCENTIVE DEFINITION, AND HOW TO MAKE THE MOST OF THE PROGRAM.

When software development becomes R&D

ELIGIBLE SOFTWARE DEVELOPMENT AS r&d

What is the difference between routine software development and that which qualifies as R&D?

This question is commonly posed by AusIndustry as a part of their compliance reviews, requesting further information.

Software development has long been a contentious area for R&D claims, and it is also the fastest growing area.

With the burgeoning start up ecosystem in Australia and internationally fuelled by seemingly endless online marketplaces and software as a service offerings, software development R&D claims are likely to continue to increase, as is the scrutiny which will be applied by regulators.

So, how do you know your software development activities qualify as R&D? And importantly, if you are already claiming, are you describing your activities appropriately to minimise the risk of audit activity.

IDENTIFYING R&D IN SOFTWARE DEVELOPMENT

Completion must be dependent on the development of a scientific or technical advance, and the aim of the project must be resolution of a scientific or technical uncertainty. 

You may be undertaking R&D if:

• The context in which a solution is sought makes the solution unique or adds complexity,

• there is no reference solution or knowledge that can be leveraged, and

• experimentation (testing of a number of prototype designs) will be required to achieve the solution, or certain aspects of the solution.

To summarise, any software development work where considerable scientific or technological challenges are faced should be considered, provided the solution is not available to, or readily deducible by a competent professional working in the field.

EXAMPLES OF R&D CLAIMS INCLUDE:

• Development of new algorithms, theorems, architectures, protocols, rules engines.

• Advancements to existing system capabilities in areas of performance, security, scalability, availability.

• Redesigning existing systems using new/different technologies, e.g. a legacy monolithic application to decouple functionality, new architecture design to optimise cloud storage.

• Systems integration that involves large scale and complexity of components not previously integrated in a similar manner.

• Developing unique middleware layers for translating messages between differing systems/layers.

IMPROVING YOUR R&D NARRATIVE

In claims that we review, we often find that there is insufficient detail that would enable AusIndustry to ascertain the registered activities meet the legislative definition of R&D activities. Often companies will provide very brief narrative, or discuss commercial objectives and development outcomes.

Here are our top three tips for improving R&D activity descriptions:

1. Discuss the state of the art and available knowledge, emphasising how the scientific or technical knowledge you are seeking differs.

2. Outline research undertaken in an attempt to identify existing solutions that may be leveraged, and the scientific or technical unknowns which remain.

3. Describe the experiments that have been undertaken from a procedural perspective (hypothesis, process of testing, outcomes including observations and evaluations, further design revisions).

Using a R&D Tax consultant that specialises in software R&D claims can significantly improve claim outcomes and efficiency. They should be able to understand the technical terms, work undertaken, and ask the right questions to probe into the strongest areas. Using an interview process, they should be able to identify and document the R&D activities undertaken.