R&D Tax Incentives for Small Business in Australia

TAXATION LAW
R&D TAX INCENTIVES FOR SMALL BUSINESS
INTRODUCTION
Australian Taxation Office (ATO) the taxation controlling arm of the Revenue
Department in Australia started offering R&D incentives from 1 July 2014. It set aside
an A$100 million threshold for companies to spend on R&D and claim concessional tax
offset under R&D Tax Incentive Scheme. Even for companies who spent above the
threshold, the R&D Tax Incentive was available at the company tax rate, as per Bakker
& Kloosterhof (ed.), (2010). This tax offset was categorised into two periods for all
eligible small and large businesses.
(i) For income years ending before 1 July 2016, the companies could avail –
(a) 45% refundable tax offset for companies having annual turnover less than
A$20million.
(b) 40% non-refundable tax offset to all other eligible companies. They were also
eligible for cash refund in case of a tax loss.
(ii) For income years starting from 1 July 2016, the companies could avail –
(a) 43.5% refundable tax offset for companies having annual turnover less than
A$20million.
(b) A 38.5% non-refundable tax offset to all other eligible companies.
A PwC survey has shown that more than 13,000 companies, including above 10,000
SMEs, were part of this initiative by the government, although the survey also
confirmed that the eligible number of companies for the offset is about 25,000 to
30,000. This study has also confirmed that 47% of the SMEs outsourced their R&D
involving their products or services. 73% of the SMEs reported of environmental
benefits and another 83% reported benefits in worker’s health conditions. The study has
also proved that an Innovative Business is more productive, competitive and profitable,
say Jorgenson & Landon (ed.), (1993). Businesses involving R&D as a driver of their
innovation efforts have been found to be leading in the –
 Development of new products and services;
 Improving their business processes; and
 Solving their problems with an improved efficiency.

UNDERTAKING R&D TO AVAIL BENEFITS
The awareness created by the ATO about the benefits associated with R&D Tax
Concessions has shown that more than 90% of companies in the SME Segment are
showing an ongoing commitment towards R&D. This is not only central to their
business, it is also at the core of their competitiveness, as per Tooma (ed.), (2008).
These companies have proved that a commitment towards R&D at the administrative
level plays a key role in establishing new markets with the help of new products or
processes or services being developed through sustained R&D. These companies have
experienced an enhanced level in their market position through development of new and
even improved products or processes or services, assert Cch, (2010). These companies
are maintaining and in some cases even cutting down their expenses and have shown a
growing trend in their revenue generation because of reduced costs concerning their
production, operational and delivering systems, declare Nethercott, Devos &
Richardson, (2010).
Approach Adopted
Companies are using at least one and in some cases all of the following three R&D
investment strategies in their business operations –
1. The Proactive Approach
This approach makes the administration invest in R&D for generating new
products or processes or services.
2. The Reactive Approach
Those following this approach invest in R&D for modifying or improving the
existing range of their products or processes or services.
3. The Production Efficiency Approach
Those following this approach make investment in R&D for developing either a
new or an improved version of their product or process or service in order to
reduce the costs and enhance the productivity.
Whatever be the approach of the companies following the practice of R&D, 66% are
focussing on development of next generation versions of their existing products or
processes or services. 54% are concentrating on extending their existing products or
processes or services and more than 32% are developing products or processes or
services which are entirely new in their field or expertise, whereas another 21% is either
adopting and/or adapting itself to an off-the-shelf technology, as per Coughlan, (2003).

Purpose of R&D
On the whole, the managements of 38% of these innovative companies are working
towards benefits derived from their R&D investment by improving their
competitiveness with increased productivity and even reduced production costs. About
28% are making efforts of staying ahead of the market or are trying to enter new
markets through their R&D efforts and the remaining 34% are investing in R&D to
meet the changing needs of their customers by developing innovative products or
services, says McCouat, (2012). This study has observed that small businesses are
investing in R&D mainly to develop new products or services for developing new
markets. Hence the focus of most small businesses on undertaking R&D was to develop
a next generation product or service so they could increase their market share, assert
Reynolds, Williams & Savage, (2000).
In-House R&D
This study also confirmed that above 90% of the companies preferred their R&D to be
in-house. Reasons such as Intellectual Property, commercial interests, competitors
advantage and retaining of knowledge were backed by lack of control in a third party
environment and dependence on external workforce. It makes sense when protection of
commercial values and outcomes of the research are at stake because of competitors
taking advantage, as per Lindahl, (2008). Moreover, retaining the skilled technical and
trade staff in an overzealous labour market is a big challenge in the current stimulating
work opportunities and since many R&D projects involve changes to be affected in the
manufacturing process, design or innovation, the emphasis on in-house R&D id
favourable as the management can draw from the skills and knowledge of the in-house
staff who understand the internal arrangements and requirements for innovation.
Patents and Intellectual Property
Protection of Intellectual Property (IP) was cited by more than 48% of the respondents
to this study. The remaining 52% were concerned about the industrial secrecy and
technical dead-ends leading to reverse engineering, says McCouat, (2012). Every
innovator wants to protect their IP and work hard for a good return on their investment.
This is more so among the SME companies who acknowledged that patent protection
came at a high cost post the results of the R&D. It was also stated that such actions are
time-intensive and may lead to disclosure of sensitive knowledge to competitors. The
biggest drawback of external R&D companies is that they have limited control on