Is your new business eligible for innovation tax concessions?

By Ben Macpherson - January 11, 2018

A good idea, hard work and a driving ambition are fundamental to getting a new business off the ground. But sometimes a little more is needed to make best use of the finances accumulated to fund your “next big thing”.

This article was written in partnership with Pragma Legal

Since Australia’s competitiveness in the future rests to a large extent on our ability to turn innovative ideas and concepts into successful businesses with global potential, there are Government grants and incentives on offer to bring exciting ideas to life.

But accessing these concessions means making a compelling case for eligibility, including ensuring you have the processes and documentation in place to support your application.

The best-known concession is the Research and Development (R&D) tax incentive —a tax offset designed to encourage companies to engage in research for business purposes or the development of services, products, processes or systems that will benefit Australia.

The nature of your R&D tax offset depends on the activity you are undertaking and the size of your company.

Companies undertaking R&D may be eligible for:

  • a 43.5% refundable tax offset for eligible entities with an aggregated turnover of less than $20 million per annum, provided they are not controlled by income tax-exempt entities; and
  • a 38.5% non-refundable tax offset for all other eligible entities (and entities may be able to carry forward unused offset amounts to future income years).

In general, your notional deductions for the R&D tax offset needs to be at least $20,000, but there are also some circumstances in which a smaller deduction is also eligible.

Determining whether your business is eligible for the R&D tax incentive and registering your claim with the Department of Industry, Innovation and Science requires careful consideration, including understanding the rules around what is eligible and ineligible expenditure.

Less well known than the R&D tax incentive are concessions for investors in new, innovative companies with accelerated growth potential.

As of 1 July 2016, investors in what is termed an Early Stage Innovation Company (ESIC) have been eligible for a variety of tax incentives, including:

  • a non-refundable carry forward tax offset equal to 20% of the amount paid for their qualifying investments (capped at a maximum offset of $200,000 per investor each year).
  • Modified capital gains tax (CGT) treatment, under which capital gains on qualifying shares that are continuously held for at least 12 months and less than 10 years may be disregarded.

Together these represent an attractive incentive for potential investors, but they are only available to companies that meet what is known as the “early stage” test and one of two tests measuring innovation.

To pass the early stage test, the company has to:

  • have been incorporated or registered on the Australian Business Register within the three previous years;
  • have total expenses of $1 million or less and assessable income of $200,000 in the previous year; and
  • not be listed on any stock exchange.

There are two tests to judge innovation; the quantitative 100-point innovation test and the qualitative principles-based innovation test.

These each look at elements of the company’s activities, funding and structure, including such matters as how it invests in research or development, whether it has patents, high growth potential or a commercialisation strategy.

Compiling the documentation and evidence you need to make your case may seem a challenge, but the benefits to both the company and its investors are compelling.  

Pitcher Partners can assist in determining whether your business meets the requirements for R&D and other tax concessions, and has an expert team able to ensure you present the most compelling case.

Pitcher Partners and Pragma Legal have joined forces in Perth to provide fixed-price services for start-ups and scale-ups. For more information, see Pragma Legal.

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