Next fiscal year, startups will need to consider the effect of the recent changes made to the R&D tax scheme. Since 2011, the scheme has provided companies both large and small with tax offsets to encourage ‘research and development’, innovation and the like to ultimately benefit Australia as a whole.
Small businesses should take note of the following changes to the scheme:
- Cap on the R&D tax concessions
A $4 million cap is now placed on the cash refundable portion (for companies with a turnover of less than $20 million).
- Intensity threshold
Larger companies must expend a greater percentage of their business specifically on R&D to be eligible for the scheme.
- Companies with an annual turnover of more than $20 million, spending less than 2% of their expenses on R&D, may only claim 4 percentage points of their R&D expenditure.
- Companies spending between 2% and 5% of their business expenses on R&D may claim an offset of 6.5%.
- Where R&D expenditure is between 5% and 10%, an offset of 9% may be claimed.
- For companies where expenditure is at 10% or more, the offset is set at 12.5%.
These reforms may benefit startups with over $20 million in annual turnover, but they could also negatively affect smaller tech startups, especially those dependent on the scheme.
We are fortunate that the cap will not impact foundU but we are very aware of the sacrifices and investment required to get a startup to cash-flow positive. Where significant investment is typically made, the cap could impact innovation.
A survey by StartupAus recorded that 90% of participating companies were claiming R&D tax, and the scheme was rated a 4 out of 5 in importance to business operation.
When it comes to startup tech companies, most of the funds from tax offsets go toward innovation, experimentation, and development. The annual rather than quarterly payout also cuts it close for many businesses.
Experts say Australia is falling behind when it comes to encouraging, facilitating, and investing in R&D. This will cause businesses, especially those in the software industry, to rethink whether keeping their R&D in Australia is worthwhile.
Next financial year, businesses – especially SMBs and startups – should evaluate the impact of the R&D tax scheme change, and whether they will need to make adjustments as to expenditure.