Tax incentives for research and development (R&D) – Corporation tax


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As we begin to adapt to new market conditions and have witnessed a significant shift in business primarily due to greater adoption of new technologies and changing market demand, people should consider and explore the use of research and development (R&D) tax incentives to support their businesses.

The R&D tax incentive aims to encourage companies to engage in R&D activities that benefit the business and the economy. It provides for tax compensation for these eligible R&D activities.

It has two main components;

  • Refundable tax compensation for certain eligible entities whose cumulative revenue is less than $20 million; and

  • Non-refundable tax compensation for other entities

Software-related activities are a key element in this area.

In April 2021, guidance was published for public consultation, closed in June 2021.

Kris Gale of Michael Johnson & Associates, a key expert in the field of research and development tax incentives, said:

“The project is a marked improvement over previous versions released to the market over the past half-dozen years and includes a case study, something that has been absent from guidance documents for a long time.”

Kris Gale then describes the major updates to the new software guide, which include:

  • Revised case study to provide additional detail and illustrate the self-assessment process using the Client Portal registration form;

  • Updated software exclusion guidelines to align with all other exclusions listed in subsection three55–25(2) of the ITAA 1997;

  • Provide links to support resources.”

Now is the time for companies to seriously consider whether they can access this type of tax incentive. As we see in the area of ​​restructuring and insolvency, a number of companies fall into financial difficulties and ultimately into insolvency because they do not pivot quickly enough to meet new market conditions. market and these changing consumer demands.

It’s certainly likely that regardless of which federal political party wins the May 2022 election, a focus on innovation and change will be critical for business. Using the R&D tax incentive is an effective way to help companies develop new ways of delivering products or services, primarily with a technology-based approach. In the short term, investment difficulties can be alleviated by having access to this tax incentive.

In many of the restructuring and insolvency cases Cathro & Partners has been involved in, we have seen companies access the R&D tax incentive. Yet we have also seen many companies not accessing the R&D program when they might be eligible for such an incentive.

We believe that the popularity and accessibility of such a tax incentive is becoming more mainstream, reflecting the changing business conditions that business owners are currently experiencing.

Kris Gale says:

“We expect to see a growth in the number of R&D applications made by companies in the coming years due to changing business market conditions. Some companies are already struggling to keep up with these increasing changes and often we see them just giving up because they don’t want to make the critical changes needed to meet new market expectations by consumers and customers.”

Kris goes on to say:

“While we are delighted that new guidance rules such as the recently released software guidelines are helping to clarify and make it easier for business owners to access, it is still very important that business owners seek a knowledgeable adviser and ensure that the a company considering making a major investment in a new product or service, can actually afford to undertake such work and has access to sufficient funds, capital and R&D tax incentive which, individually or in combination with each other, will be enough to allow the company to grow and prosper in the years to come. In other words, make sure the company has enough money to undertake this new investment.

One consideration that might be explored by business owners when restructuring their business or looking to enter new markets or provide new products or services is if there is any concern about the financial capability of the business. to implement these changes. Exploring restructuring options such as safe harbor provisions during the process is one safeguard that could be taken to protect directors. Although it seems quite separate from each other, often people who have been permanently affected by market changes and are experiencing the financial impact of such a change, hastily pivot into one area without understanding all the financial consequences of such a change or even whether this is the right thing to do.

They may also not realize that if they are currently in financial difficulty and on the brink of potential insolvency, making permanent changes through a new offering or even a deal can inevitably hasten their fall into insolvency.

In conclusion, when making changes to your core business, be careful, plan well, and make sure you have access to any government aid or incentives available, such as the R&D tax incentive.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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