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.

Managing your R&D Tax Incentive risk - checklist

aUDITS ON THE r&d INCENTIVE HAS BEEN STEADILY INCREASING

With ATO and AusIndustry audits on the increase in the R&D Incentive space, claimants and their tax advisors are facing additional rigour and controls. Where an R&D claim is outsourced to a 'specialist' R&D Tax consultant, many claimants are not fully aware of the regulatory conditions and their own obligations.

Whilst the realisation of an immediate refund or tax rebate provides a positive short term result, in the long term companies face the very real risk of having entire claims dismissed and needing to refund the benefit, with interest, and potentially penalties applicable.  

Here is a checklist to sense check that your R&D risk is appropriately managed:

X - USING A REGISTERED R&D TAX PRACTITIONER

If you are using a specialist R&D Tax consultant, make sure they are a registered R&D tax practitioner with the Taxation Practitioners Board (TPB). This is a mandatory requirement with any person not registered in breach of the law and clients left exposed to significant risk. Check the R&D Application for appropriate disclosure and with your consultant.

X - HAVE A COPY OF THE ENGAGEMENT LETTER

An engagement letter should be present between you and your R&D Tax consultant. It is important to understand the scope of services being provided and evidence of using a registered R&D tax practitioner can help to mitigate penalties. 

X - AUDIT ASSISTANCE IS PROVIDED AT NO COST

Ideally, an engagement should provide audit assistance at no cost. As the program is self assessment, specialist R&D Tax consultants should stand by the work they have undertaken. This also incentivises high quality work with a focus on reducing the risk of an audit. 

X - R&D TAX PRACTITIONER HAS DOMAIN SPECIFIC EXPERTISE

Your R&D Tax consultant should understand the nature of the scientific/technical activities undertaken and should document your R&D position, rather than asking you to document this. Insufficient understanding of the scientific/technical activities means activities may not be appropriately identified, or adequately documented, increasing the risk of an audit.

X - SUFFICIENT DETAIL IN THE AUSINDUSTRY R&D REGISTRATION FORM

Sufficient detail in the AusIndustry R&D Registration Form is required to enable an assessor to conclude that R&D activities have been undertaken, minimising audit risk. Have you clearly documented a knowledge gap, and the steps involving a falsifiable hypothesis, testing, results and observations towards developing new knowledge?

X - SUPPORTING DOCUMENTATION IS PRESENT, INCLUDING RECORDS OF EXPERIMENTATION, AND EVIDENCE OF TIME/EFFORT SPENT ON R&D ACTIVITIES

Do you have adequate substantiating documentation that links/evidences the R&D activities claimed and expenditure incurred? This is a key audit focus/risk area. This should be in a centralised location and easily accessible in the event of an audit. Please see our separate blog post on this here.

X - ADEQUATE EXPERTISE IN R&D TAX INCENTIVE SCHEME REQUIREMENTS

Have you been asked about your 'aggregated turnover' (group revenue), which is calculated on a group basis and determines the rate of R&D Tax Offset and refundability? A common mistake is considering the revenue of the claimant entity in isolation.

Are you using a simplified approach to defining R&D activities, making whole of project claims? This is a high risk area that AusIndustry and the ATO are focusing on.

Do you have a number of support R&D activities in the AusIndustry R&D Registration Form? AusIndustry has stated that every project should have at least one. Projects without this will present a high likelihood of audit.

Are you claiming for overseas R&D activities without pre-approval from AusIndustry? Minor or incidental amounts informing the R&D activities (e.g. conference travel) are acceptable, however, claiming for a number of R&D activities which have been conducted overseas is not.

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

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.

R&D Tax Incentive...you are doing it wrong!

common mistakes with the R&D tax incentive

Over the last few months we have worked with a large number of companies that had previously accessed the R&D Tax Incentive program either internally or through external consultants 'specialising' in this space.

We have found that companies/consultants are not getting things right with regards to specific areas within the R&D Tax Incentive.

Here are the top 10 things we have found:

1. Lack of sufficient detail in the AusIndustry R&D Registration Form which would enable an assessor to conclude R&D activities have been undertaken, minimising audit risk. 

2. Confusing experimentation with the product concept/market acceptance with experimentation to address technical or scientific knowledge gaps.

3. Misunderstanding the scope of activities that may qualify as R&D and associated expenditure that is claimable.

4. Not having the right structures or agreements in place to be able to claim the R&D Tax Incentive.

5. No focus on underlying substantiating documentation that links/evidences the R&D activities claimed and expenditure incurred. A key audit focus/risk area.

6. Thinking the current rate of the R&D Tax Offset is 43.5%.

7. Not understanding the definition of 'aggregated turnover', which is calculated on a group basis and determines the rate of R&D Tax Offset and refundability (ATO link).

8. Not understanding the 'for whom' (ATO link) and 'at risk' (ATO link) requirements which can dictate whether a claim can be made and the scope of a claim.

9. Thinking all software development qualifies and/or inappropriately making whole of project claims, a high risk area AusIndustry and the ATO are focusing on. 

10. Not using a consultant that is a registered tax practitioner, or that understands the nature of the scientific/technical activities undertaken.

A recent Innovation Australia update echoes some of these concerns and can be found here.

With great pride I can say we have been successful in tendering against 'Big Four' providers, and incumbent mid-tier firms based on our specialised software and technology industry R&D Tax expertise.

We have been able to significantly improve claim outcomes, efficiency, and minimise risk. Part of this involves applying a 'real time' assessment and substantiation approach. Something which is uncommon amongst R&D Tax consultants who often review/prepare a claim retrospectively. 

We offer existing claimants a no obligation, free "Health Check" review. This can provide you with peace of mind and comfort surrounding existing claims. 

It is carried out at no cost to you.

TALK TO US TODAY ABOUT HOW WE CAN MAKE OUR EXPERTISE WORK FOR YOU: info@rsfconsulting.com

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.

The R&D Tax Incentive, is it time for a Health Check?

The Balanced Risk

To kick off our blog, I thought I would discuss the balanced risk associated with accessing the R&D Tax Incentive program. 

The R&D Tax Incentive program is a tax based program which companies are entitled to claim each year.

It is not a Grant. It is self assessment much like a company's income tax return or an individual's income tax return. A positive is that you have more short term certainty that any funding will be received. However, longer term, claims may be audited, and there is the risk that a company may have to pay back amounts received including interest and penalties, if applicable.

Just because you have been receiving funds under the R&D Tax Incentive for a number of years successfully does not mean that claims made have been accepted as valid. In fact, the longer you have been claiming under the program, the higher the risk of an AusIndustry or ATO review occurring.

AusIndustry reviews are common, with a company typically reviewed once every four years. Greater focus is typically placed on first year claimants, and particular claim types such as software development. ATO reviews are increasing. Key focus areas include refundable R&D Tax Offset claims, software development claims, and legislative integrity provisions such as "payment to associates". 

Contemporaneous substantiating documentation is critical and sought by both regulators.

From successfully passing a review, comes greater comfort. 

SO ARE YOU AUDIT READY?

At RSF Consulting, we offer claimants a no obligation, free "Health Check" review. This can provide you with peace of mind and comfort surrounding existing claims. The review will look at past claims focusing on:

• claim risks and recommendations on how these may be reduced,

• where additional value exists, which may be accessed, and

• where the process of making a claim can be made more efficient.

This is carried out at no cost to you. The process does not require significant input from company personnel, and focuses on reviewing existing claim related documentation.

TALK TO US TODAY ABOUT HOW OUR “HEALTH CHECK” CAN WORK FOR YOU.