As we start to settle into the new market conditions and have witnessed a significant change in businesses primarily, as a result of a greater uptake in new technologies and changing market demand, people should consider and explore the use of the research and development (R&D) tax incentives to support their businesses.
The purpose of the R&D tax incentive is to encourage companies to engage in R&D activities that benefit the business and economy. It provides a tax offset for these eligible R&D activities.
It has two core components;
- A refundable tax offset for certain eligible entities whose aggregated turnover is less than $20 million; and
- A non-refundable tax offset for other entities
One key focus in this area is software-related activities.
In April 2021, guidance was released for public consultation, closing in June 2021.
Kris Gale of Michael Johnson & Associates, a key expert in the field of research and development tax incentives, stated:
“The draft is a marked improvement on previous versions released in the market in the past half dozen years and includes a case study, something that has been absent from guidance material for a long time.”
Kris Gale then outlines the key updates to the new software guide, which includes:
- Revised case study to provide additional detail and illustrate the self-assessment process using the customer portal registration form;
- Updated guidance regarding the software exclusion to the alignment with all other exclusions listed in subsection three55–25 (2) of the ITAA 1997;
- Providing links to supporting resources.”
Now is an opportunity for businesses to seriously consider whether they can access this type of tax incentive. As we are seeing within the restructuring and insolvency space, a number of businesses are falling into financial distress and ultimately insolvency due to not pivoting quickly enough to meet new market conditions and these changing consumer demands.
It is certainly likely that whichever Federal political party wins the election in May 2022, the focus on innovation and change will be key for businesses. The utilisation of the R&D tax incentive is an effective way to help businesses develop new ways of providing products or services, primarily with a technology-based approach. In the short-term, investment pain can be alleviated by accessing this tax incentive.
In many restructuring and insolvency matters that Cathro & Partners have been engaged on, we have witnessed businesses with access to the R&D tax incentive. Still, we have also seen many businesses not access the R&D scheme when they may be entitled to such an incentive.
Our view is that the popularity and accessibility of such a tax incentive is becoming more common, which reflects the changing business conditions, business owners are currently experiencing.
Kris Gale states:
“We are expecting to see a growth in the number of R&D applications been made by businesses in the forthcoming years as a result of the changing business market conditions. Some businesses are already struggling to meet these mounting changes and often we see them just give up because they do not want to make those critical changes required to meet the new market expectations by consumers and clients.”
Kris then goes on to say:
“Whilst we are pleased that new guidance rules such as the recently released guidance on software assists in clarifying and making it more easily understood for business owners to access, it is still very critical that the business owners seek a competent advisor, and ensure that the business that plans to move towards a significant investment in a new product or service, can actually afford to undertake such work and has access to sufficient funds, capital and the R&D tax incentive that will either individually or in combination with each other be sufficient to enable the business to grow and thrive in the years to come. In other words, make sure the business has enough money to undertake this new investment.”
One consideration that could be explored by business owners when they are restructuring their affairs or seeking to enter into new markets or provide new products or services is if there is some concern around the financial ability of the company to implement these changes. Exploring restructuring options such as the Safe Harbor provisions during the process is a protective measure that could be taken to protect directors. Whilst it does seem quite separate to each other, often people who have been permanently impacted by market changes, and are experiencing the financial impact of such a change, hastily pivot into an area without understanding the full financial consequences of such a change or even if it’s the right thing to do.
They may also fail to realise that if they are currently in financial distress and on the verge of potential insolvency, making permanent changes through a new offering or even market may inevitably expedite them falling into insolvency.
In conclusion, when making core business changes, be cautious, plan well and ensure that you have access to all the available government support or incentives like the R&D tax incentive.
