Have you considered applying for a research and development grant for your business? We have a treat for you! In this episode, we invited Greg Will of Armstrong Dawson to share his expertise in this area. In less than 30 minutes, find out when you may claim R&D grants, what sorts of expenditures it may apply to, what sorts of things to avoid, and many more!
Joanna: I’ve got a special guest here today to give us an accounting perspective on R&D grants – Greg Will. Greg is the principal of the accounting practice Armstrong Dawson. He comes from a background in a previous life as a partner within first and second tier professional service firms. He is here today to share some of his knowledge of this area of R&D grants which I feel is really relevant to the sorts of topics that often come up when I’m chatting with our clients about resources that might help to expand their businesses. So Greg, it’s great to have you here today.
Greg: Thank you. Looking forward to it!
Research and Development Grants
Joanna: How about we start off by maybe you give us a bit of a background on what R&D grants are available for businesses right now?
Greg: R&D grants – they’re in the news at the moment. The ATO, they’re a hot topic with them, and you may have seen them being discussed in recent AFR publications. An R&D grant is a research and development grant that allows a taxpayer to claim back or get an offset on any of their eligible research and development activity. Research and development activities is where you’re looking to experiment or develop or innovate a product that is able to benefit your business or be able to benefit other businesses and you’re able to get a tax offset on that.
Who is it for?
Joanna: How have you seen this work with your clients? What are the biggest opportunities that you’ve seen your clients use these grants for?
Greg: Particularly, start-up businesses use R&D grants a lot, so do established businesses. But start-up businesses use it a lot because where you are in the early stage of a business and you’re developing a product the R&D grant allows you, subject to certain turnover hurdles which I’ll go through in a minute, to get a cash refund for part of the R&D expenses that you claim and you pay for. It really allows a cash injection into a business particularly where they may not have any revenue or they may be starting up. A lot of businesses in the start-up space use the R&D grant initially to sometimes fund or seed their business.
Joanna: You talked about the requirement for some sort of innovation in relation to getting the R&D grant. What does that actually mean from a practical perspective?
Greg: From a practical perspective you need to be taking on an experiment. You need to be going into an area that’s unknown and there’s a level of technical risk. It may be developing a type of widget or a new type of software algorithm or something that the outcome of that experiment or experimentation is not known. And so by doing that, you’ve got risk in doing that and what the government is trying to do big picture is provide an incentive for Australian businesses to do that research and do that development on that experimentation and get an offset of those costs.
R&D grants for apps
Joanna: The topic of apps has been thrown around a lot recently. I know a lot of our clients are getting involved in apps. In fact we’re looking at getting close to launching an app or developing an app for our business soon as well. But apps are one of those areas traditionally they’ve been seen as innovative, but now obviously there’s a lot of it around. Let’s say in this area of apps what would make an app innovative enough for it to be something that we could be looking at R&D grants for.
Greg: Perfect question. I get this question a lot. If we look at something like an app the first thing I’d say is that an R&D grant cannot be claimed on something that has already been developed or already known. It’s on new knowledge. There’s thousands, hundreds, millions of apps out there. But if in the subset or in relation to a particular app, there may be a new type of algorithm or a new type of approach within that app that is being developed and hasn’t been developed before. And so there is experimentation in designing and building and that app and so that would be regarded as research and development.
But if you’re purely just saying I’m an accounting firm or a law firm or an engineering firm and we just want to develop an app to be able to communicate with our clients a lot easier, that would not be research and development because one, that is not new or innovative in that those apps are already around. And so because there’s nothing new in relation to that concept of developing that app that wouldn’t be considered research and development. But if there was an app that nobody had developed yet or an app that somebody had developed in a certain way but you were looking to do it in a different way where there was either new innovation in experimentation or something that had not been done before within an app or part of an app then that would be considered research and development. Does that make sense?
Joanna: Absolutely. And so I guess to make it even clearer do you have any examples? Have you worked with any clients who have used R&D grants in app development?
Greg: Yes. We’ve had a number of clients that have gone into and looked at apps and software and what we’ve got to clearly explain to them is two things. I’ll give you one example. There was a client of ours that developed an app and one there was a type of app that had been sort of developed down this line in the US but this client of ours there was a whole lot of different algorithms within the back end of this app that had never been developed in this way before. And so because of that, the app qualified for research and development. But if this client just took the app that was currently had been developed and just improve upon that then that wouldn’t have been R&D. I’ll just make a very clear distinction. An R&D grant can only be applied for and be successful, if you’re looking at technical risk not at commercial risk and I’ll explain those two topics.
Commercial risk is around looking at a technical outcome or something that is unknown. Commercial risk is more around how do we commercialize or how do we sell this app. You might build an app and for whatever reason you’re spending money to try to get people to buy it. That’s not R&D. That’s just trying to commercial that application itself. But if within that application you’re doing something to develop, improve and do something different within that app irrespective of whether people buy it or not or if you commercialize it, then that is R&D and that’s the clear distinction between the two. Some people get confused around commercializing something versus the technical risk of something and that’s the clear fence line between what innovation is and what’s not.
What can I use the funds on?
Joanna: So then the funds that are delivered as part of the grant can be used obviously for the development but I understand they can also be used for associated fees like for example legal fees. Is that right?
Greg: Yeah. Let me just talk through some of the criteria so that it builds on what you’re saying. Firstly, in order to see the first thing you’ve got to do is that any activity that you’re performing you’ve got to determine whether that is all innovation under the research and development guidelines and there’s a whole lot there which I won’t go into because it’s about two pages worth. But basically it’s around doing something that’s a technical risk that’s innovative – all those things we’ve just spoken about. But you have to have a minimum in any one year of $20,000 spent in relation to research and development. If you haven’t spent up to $20,000 or over $20,000 then you cannot claim R&D for that year. It then falls down to what is your turnover.
There’s a difference if your turnover is less than $20 million a year or greater than $20 million a year. If you’re under $20 million a year and you’ve spent more than $20,000 in R&D activities, there’s two ways that you can or two ways that you could benefit from claiming the grant.
One is if you are in a taxable situation so you are paying tax that you get an offset of 43.5% of any R&D expenditure that you’ve spent. Let me use some examples here in a minute or you get a cash refund of the 43.5% of the research and development expenditure. I’ll use an example to make it clear.
Let’s just say we’ve got a business it’s got no turnover and it’s got no profit for this year but they’ve spent $100,000 on R&D activities which qualifies for the grant. If you times that $100,000 by 43.5% that’s $43,500 you would get a check in the post from the ATO for $43,500 for spending that hundred grand on R&D expenditure.
Types of R&D expenditures
Joanna: What is included then in the R&D expenditure? Obviously wages, fees…
Greg: Yes. It’s broken down into two parts. Firstly there’s what’s called core activities. And then the other part is called supporting activities.
The core activity is anything that’s in direct relationship to doing the R&D activity. Just think about it if we were developing back to your original example either an app or some software, we would have developers; we would have possibly some engineers; and we’d have other consultants or expenditure that was directly related to the core activity of developing that application or software. And then to your example there’s then supporting activities which could include any auxiliary expenditures like legal fees, accounting fees, wages anything that then supports that activity and I’ll talk about how you calculate those in a minute but those two activities are core activities. What I would deem direct costs of the R&D activity and then the supporting activities the indirect cost. You can look at both of those expenditures to put those together for your total claim of R&D which those indirect costs do include things like rent and other auxiliary costs which form part of the cost to do the R&D activities.
To use an example. And I’ll use some of the some of the expenses that you’ve claimed. Obviously if you’re if you’re performing R&D activities and let’s just say you’re performing R&D activities to develop a widget. One of the things you would do as you’re developing that widget or on the finalisation of developing that you would want to either trade mark or protect that widget from a legal perspective in order to make sure that obviously all the expenditure that you’ve spent that you can to make sure you can maximize that. Legal fees in relation to trade marks and other IP protection would be a core activity of the R&D grant because that’s directly related to what you’re doing.
But for example of an indirect one if you have a business and let’s just say 20% of your time in the business is spent in relation to this R&D and the other 80% is in relation to the normal running of the business then using that example 20% of any auxiliary expenditure like rent, like wages, like stationary, like a few other things. You could apply that to the R&D grant as supporting activities in relation to the R&D. Does that make sense?
Tips and Traps
Joanna: Yeah, absolutely! It seems like there’s possibly some opportunity here as well for some business sectors. In my mind as you’re talking I’m just thinking developers and engineers who do a lot of work in this space potentially can be using the concept of R&D grants for their clients to be funding they work with them.
Greg: Correct. There is a bit of a tip and trap there which I’ll just allude to now so if you’re in a business environment like an engineer or a developer or something like that, the tip and trap is this – that in order to claim the R&D grant, you must be the ultimate owner of the IP or trade mark that is being developed.
Just think about this if you’re a developer and you’re helping a client of yours develop this app. The question is who claims the R&D grant – the developer themselves or the client that’s engaged the developer?
The answer is whoever’s going to have the ultimate ownership of whatever is being developed in that case because otherwise then we have two people claiming the R&D on the same thing. We have to be very clear on that perspective.
And the other tip or trap is there is that it’s also around making sure that in terms of the ownership that even though you may be helping to develop it for a client it’s got to be very clear as to who’s going to claim accept. It may not be clear who’s going to own the IP at the end of the day or it might have been in the engagement although all the terms and conditions when you’re working with a client so it might be a little bit vague. You want to make sure if it is vague one that it’s clear. But if it’s not clear you’d have to determine if the client of yours is going to claim the R&D. Because if you want to claim it as well that’s where you’re going to get picked up trying to claim the R&D twice for the same thing.
Joanna: And look this is a really interesting point that you’ve made because it is something that I see a lot when organisations are engaging people to create something on their behalf. Often they fail to think clearly about IP ownership and IP ownership of the underlying product or service that is being developed. And it just shows not only is the R&D grant then questionable in relation to who has the rights of claiming that grant. The underlying issue of who actually owns that underlying intellectual property is potentially even a bigger issue that really needs to be dealt with at the outset.
Greg: Correct and further to that. That’s why you look at an extension of what we’re just talking about that the claimant doesn’t have to do the R&D work themselves so you can contract or outsource somebody else to do the R&D work. Obviously you’re paying them to do that. But the only determinant is who owns the IP. You don’t have to have do the work yourself you can actually think to yourself “Well, I want to develop…” and let’s just use this app example again and something new and that’s innovative and hasn’t been done before. I’m not an expert in that so I’m going to engage a developer to help me do that. You’re not actually doing it yourself you’re engaging someone to help you. As long as you own the IP then that’s when you can claim. It’s very important to think: “Hang on a minute. I’m not actually physically doing the development myself.” That doesn’t matter. It’s who owns the IP.
Joanna: I guess we’re lining up here our contractual rights together with our our accounting opportunities I guess which is what we’re talking about here really is an opportunity for businesses in this area. What tips do you have then for businesses who want to apply or on the flip side what have you seen go wrong that you would recommend businesses try to avoid.
Greg: There’s been a lot of press lately that R&D grants have become very very popular because particularly there’s been a lot more start-ups within the community and business world and so there’s a lot of activity within R&D so the tips and traps just to run through a few of these.
Firstly, because there’s been so much popularity around R&D grants there’s been a lot of people coming to the sector in order to help people do R&D. Some very very good and some not so good. And what you’re seeing out there in the sector a lot of R&D consultants or helpers actually charge a client on a success fee basis. Now we as a firm we haven’t taken the view of charging anything on a success fee basis.
Most qualified and reputable firms look at a fixed fee basis and the reason being is that if you are a good R&D consultant you should be able to help a client and determine pretty quickly whether the R&D activities that they’re doing are successful, in that they are R&D or not. If you if it’s unsure of whether the R&D is successful is actually R&D the question would be as well why are you claiming for this if it may not be R&D?
The whole issue around a success fee around this, I feel, is not the right sort of outcome in order to way to help clients get an R&D grant. I feel that it should be looked at so the client knows how much it’s going to cost and the consultant knows how much it’s going to cost irrespective of whether the claims are going to be a million dollars or $20,000 it shouldn’t matter, subject to the work involved on that.
The second thing is that what people have to understand is that you can’t double dip and I’ll explain what I mean by it. If you’re claiming R&D expenditure you can’t also claim that as a tax deduction. I’ll use an example just so people are clear.
If I’ve got a company and to make it simple all I’ve done in the whole year R&D activity, so R&D expenditure. There’s no other costs in my business except R&D. Those R&D activities total $100,000 and I’m claiming that hundred thousand dollars for the R&D grant. And if you remember my original example you get that $43,500 in cash for doing that. You can’t also then claim as a carry forward tax loss that hundred thousand dollars. That hundred thousand dollars loss would be reduced to zero because you claimed that as R&D grant. You can’t claim it as a tax loss and an R&D grant you can only claim one or the other. That’s the other sort of trap that some people fall into.
The other trap, and I’ll just talk through the process, so once you’ve done your R&D application that goes to government department by the name of AusIndustry and AusIndustry register that R&D activity and they give you a certain reference number and letter confirming that. And then once you’ve got that you use that reference number and that letter to put that R&D expenditure with that reference number into your tax return so you can claim the R&D grant.
What some people mistakenly think is that when AusIndustry actually provide that reference number in that letter they sometimes feel that that is an approval or that’s been accepted as research and development. The AusIndustry – all they do is register the research and development. They’re not there to say whether it’s actually R&D or not. The ATO – they are the ones that determine at the end of the day whether it is a qualifying R&D expenditure or not.
We’ve seen clients come to us from other accounting firms in the past where they felt that the R&D had been approved because they’ve got that letter from AusIndustry. A year later the ATO has knocked on their door and said we just want to make sure that you’ve got all of your documentation to prove that they R&D claim that you claimed is actually legitimate and they’ve showed them the AusIndustry letter and they said well that’s fine. Your R&D has been registered. But that doesn’t mean that it’s actually R&D so we don’t believe it’s R&D and we get to knock this back and you’re going to have to pay back all of the R&D that you’ve claimed. The trap is there. Don’t feel that just cause you’ve got the AusIndustry letter that your that you’ve been approved the R&D.
The other thing sometimes we see is some R&D consultants get a little bit aggressive around that if you’re running a business and you’re looking at R&D, unless your total business is in relation to R&D activity, very rarely would you be able to claim 100% of all of your expenses and overhead in your business as R&D.
You might be let’s just say you’re in the business of I don’t know you’re in the travel business and you’re looking to develop a new app for your travel business which is R&D. You couldn’t claim all of the costs of your travel business as R&D expenditure. You could only claim this expenditure that directly or indirectly relates to R&D. Be very unlikely in that example that 100% of all of your costs could be applied to R&D. It’s very important that you that you make sure that if someone tries to tell you that you can claim 100% of everything, in our view, that’s very unlikely and you don’t see that very often.
Overview of the process
Joanna: Well that’s a great summary. I love that. How do people start with the process then? What’s the process if someone thinks they’ve got something, let’s go back to our app that they think is innovative, where do they start?
Greg: Where they start is that look there’s a lot of helpful information on websites like the ATO website or the AusIndustry website or with your local advisor whether that be your accountant or your lawyer. If you’re looking to invent, innovate or experiment with something that you believe may be innovation or maybe research and development there are some definitions, as I mentioned they have a lot of different subsets, but there is a number of useful information and links on those websites or with your advisor that they could provide to you what the actual definition of R&D is, just so you can or they can help you determine is this R&D to start with and then if it’s R&D you go down the process of whether you want to claim it or not.
Joanna: I think we’ve spoken about this in the past and you said that you actually work with accountants in some these areas where some of our listeners are accountants. Maybe you can give us a little bit of an overview of how you work with accountants and the opportunities that you had for accountants to work with you in this area.
Greg: Sure. As I mentioned, most consultants or most specialists that do R&D are just that. They’re specialists in this work and so not every accounting firm does R&D activities. With the accountants we work with they might be great at the tax returns and accounts and tax advice and all those other auxiliary taxes but they’re not specialists in R&D’s. We work with other accounting firms and directly for clients where they may have clients that need R&D help and so they come to us and say look I’ve got Mr. Smith here who is a client of ours we’d like to work with you to provide R&D services to us so we can either work directly with their client or for the accounting firm themselves and provide the necessary R&D services and then the accounting firm can either deal with us direct or the client can deal with us to help out their client.
Joanna: Fabulous! Well look, thanks so much for coming on to Talking Law today. Just as a quick recap I might just give a little recap for our listeners in relation to what we talked about. Obviously we are talking about the concept of R&D grants for business and some great tips that you gave us there Greg is to be careful of how charges for advisers work so success fees versus fixed fees. Don’t double dip in your expenses. Don’t assume a letter from AusIndustry means you have the grant.
Joanna: Be careful in what you’re actually claiming and be suspicious if it’s 100% of everything.
Joanna: And finally be careful of IP clauses in your agreements and IP protection.
Joanna: Great! Where can people learn more about you and your business if they’re interested in doing some work in R&D grants?
Greg: Obviously they can contact you direct Joanna or they can see me in terms of my business said Armstrong Dawson and the website is http://www.armstrongdawson.com.au or they can look me up on the web and my LinkedIn profile will be shown there and they can and they can contact me direct through there.
Joanna: Fabulous! If you’d like more information about this topic either contact Greg or head over to our website at talkinglaw.com.au where you’ll be able to download a transcript of this podcast episode if you’d like to read in more detail back again, if you can’t quite remember everything that Greg just talked to us about because there was a lot of detail out there today and it was really very interesting.
You’ll also find on our website details of how to contact our lawyers at Aspect Legal if you’d like help with the legal protections like trade marks or IP clauses in your agreements that we talked about today and we’ll also have a link there so that you can get in contact with Greg if you’d like to from that site. You’ve been listening to Talking Law with Joanna Oakey. We hope to see you again in our next episode and Greg thanks once again for coming along.
Greg: No problem.