Guest post from David Kenney & Samuel Ung from Hall Chadwick
The R&D tax incentive is very enticing for all startups in Australia as the government may provide cash, up to 45% of their eligible R&D expenditure. We have highlighted a few points startups should consider.
Distinguishing technical innovation from commercial innovation
Most reviewers will agree that flappy bird success was due to the developer’s ability to create an extremely addictive game thus generating significant advertisement revenue aka commercial innovation.
Note that just because a commercial approach is innovative, it does not mean that your startup is eligible for the R&D tax incentive. The question that needs to be asked is: Does our innovative commercial approach require the company to conduct experimental activities:
(a) whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:
i. is based on principles of established science; and
ii. proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and
(b) that are conducted for the purpose of generating new knowledge.
Purpose of generating new knowledge
If Dong (the founder) decides to claim the R&D tax incentive for the Flappy Bird platform, he will need to consider whether he can demonstrate the purpose of generating new knowledge. In a recent AAT case (dated 22 January 2016), the Tribunal had to decide whether the R&D entity held the purpose of generating new knowledge.
The Tribunal affirmed that:
“it is not enough that the entity merely holds the purpose as one of many; the provision would probably have to refer to “a” purpose rather than “the” purpose for that to be the case… Instead, I consider that the purpose of generating new knowledge must be more than an insubstantial purpose; it must be substantial enough to enable the activity to be accurately characterised as conducted for that purpose. That will sometimes involve questions of degree which may be difficult to resolve.”
Startups should consider how they can demonstrate that they held the purpose of generating new knowledge, especially for those that outsource their development work.
Overseas R&D activities
Hypothetically, if an Australian company decides to pay Dong Nguyen (based in Vietnam) an annual salary of $250,000 to work on its R&D project, can the Australian R&D company claim his time as R&D?
Best to apply for an overseas finding.
What if, Dong Nguyen does not relocate but decides to set up a new Australian entity (registered for ABN) and started invoicing his time using the new Australian entity. Can the Australian R&D company then claim Dong’s invoices as R&D without applying for an overseas finding?
Australian Tax Law is convoluted and this leads to various and sometimes flawed interpretation of the legislation. Therefore, without providing legal advice, we direct all startups to read Conditions for R&D activities – Section 355-210(1)(a) of the Income Tax Assessment Act 1997:
“(1) An R&D activity covered by one or more of the following paragraphs is an activity to which this section applies:
(a) the R&D activity is conducted for the * R&D entity solely within Australia or an external Territory…”
For further information, please call Samuel Ung on 0431 709 731 or email firstname.lastname@example.org
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Samuel is a qualified solicitor and received his Bachelor degrees from the University of Melbourne. He possesses extensive experience in R&D tax claims across various industry sectors in Australia. He has built relationships with key government contacts and has an in-depth knowledge on the meaning of R&D defined within the tax legislation and the impact of recent legislative changes.
Samuel has worked with numerous tech startups including the tech startup that has the longest and highest burn rate*. The more they burn in R&D expenditure, the more benefit he got back for them.
*Disclaimer: Burn rate is defined here in terms of cash spent per month. Based on research conducted, Samuel is not aware of any other Australian tech startups that has burnt over $60 million just under a decade.