Start-ups tipped to benefit as R&D tax credits switch to quarterly basis

The introduction of a quarterly credits system for the R&D Tax Incentive will “vastly enhance” start-ups’ ability to fund their research and development activities, according to a specialist advisory service.

From July 1, 2014, the Australian Taxation Office will process quarterly returns for the R&D Tax Incentive which allows small companies to receive a refund for the cost of developing products and services.

Under the scheme, those with annual turnover less than $20 million may be eligible for a 45% refundable credit, while those with higher revenue could receive a 40% non-refundable credit.

Rather than waiting until an income tax return is assessed by the ATO, companies will be able to obtain the benefit of the offset on a quarterly basis during an income year.

The move comes after the Federal Government released a public consultation paper asking SMEs and other stakeholders to have their say on the quarterly credits initiative.

R&D tax advisory firm Swanson Reed says the change will “vastly enhance the ability of many start-up/tax loss companies to fund their R&D activities”.

“Current waiting periods for some company’s annual R&D tax offset payments are up to four months,” Swanson Reed tax principal Damian Smyth said in a statement.

Smyth said companies who receive quarterly credits based on a prior year benchmark, during an income year in which they have less R&D expenditure, must be disciplined in monitoring their net R&D tax offset position.

“Failure to manage this may give struggling R&D entitles a nasty surprise upon lodgment of their income tax returns and corresponding end-of-year reconciliation adjustments,” he said.

“A requirement that a company be a complying taxpayer is a prudent inclusion to mitigate this risk.”

David Wilson, general manager of AusIndustry, could not be reached for comment.

However, he told The Sydney Morning Herald the move will be a major boon for start-ups because “it’s all about getting their refunds to them sooner”.

“We understand that cashflow is an issue for small firms, particularly in some of the high-tech sectors,” Wilson said.

“We want to make sure the arrangements in place are smooth and there’s no compliance burden on small companies to access the quarterly credits.”

Details are expected to be finalised next year. Until then, the government will focus on developing an improved payment process, Wilson said.

Smyth already has some ideas about how the quarterly credits system should be structured.

“The requirement that a company must have lodged a prior R&D Tax Incentive claim to access the quarterly credit system may starve newly incepted companies of funding,” he said.

“We recommend an option for companies with no such history to access the system be implemented.”

“This should obviously be subject to more stringent reporting requirements to minimise the risk of phoenix activity.”