What start-ups need to know about the R&D tax incentive

So you’ve created a shiny new widget, after months of R&D and hard work. Great! You may well become the next ‘disruptor’- an Uber or Netflix service.

Of all the grants and tax incentives that are available for start-ups, you may be convinced that the Government’s R&D tax incentive is especially applicable to you as you are disrupting your niche. However, as the following checklist points out, being a startup and disruptor doesn’t automatically qualify you for the R&D tax incentive.

Align your definition of R&D and the Government’s

The Government requires that you have conducted at least one ‘Core’ R&D activity to be eligible to register for the R&D Tax incentive:

As described on business.gov.au, Core R&D activities are experimental activities:

  • whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:
    • is based on principles of established science; and
    • proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and
  • that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).

Tick off the following when assessing eligibility

  1. New knowledge – addressing the first requirement, it is not enough to offer a ‘new’ service, product or process. The work you have done to produce it must be novel on a worldwide basis i.e. there was no ready answer to the problems and challenges you faced in the course of your R&D in the public domain. Further to this, the work must have been conducted for the primary purpose of developing new knowledge e.g. evaluating whether one type of existing algorithm will be more efficient than another (when the answer to this can be deduced from existing knowledge) is not eligible.
  2. Experimentation – you need to have applied principles of established science to demonstrate the progression of an idea from hypothesis to experiment, then observe results and make conclusions that would either prove or disprove your original hypothesis. Many startup environments follow the Agile methodology where a ‘do it first and document later’ mentality is followed. However, to be eligible for the R&D tax incentive, there is a requirement that you keep contemporaneous proof of work conducted. Use task management systems and processes designed to help startups to your advantage. For example, create a task category called ‘R&D’ in your task management system to record your ‘I’m just trying something out’ moment (it doesn’t even have to be written, it could be an audio of your thought process!) Check out other acceptable forms of evidence.
  3. Technical risk – there must be an element of technical risk or uncertainty in the experimental work you undertook to uncover new knowledge. This means you could not predict in advance whether the experiment would produce the outcome you expected. In other words, you could not know from available knowledge that your hypothesis would be proven correct – there was a significant chance that the experiment would be a failure. For example, integration efforts e.g. building APIs are generally not considered to be technically risky because a) people know how to do this – it is an operational activity rather than R&D, and as such, it carries a very low risk of failure when carried out by a professional competent in this field and b) it is unlikely that new knowledge will be produced by performing such a well understood task.

Given the amount of creativity and innovation apparent in Australian start-ups, it is no wonder that 22.6% received the R&D tax offset in 2016.

Give us a call at Access RnD today to see if you can become one of these start-ups to take advantage of the Government’s generous grant.

Posted in R&D