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01 Nov 2016

Research & Development Tax Refunds: a source of funding


3 min

Innovative funding ideas for innovative firms.

In an effort to foster a culture of innovation within Australian business, the Australian Government introduced the Research and Development (R&D) Tax Incentive which encourages companies to engage in R&D benefiting Australia.  Through this scheme, companies that undertake eligible R&D activities may claim up to 45% of the expenditure as a refund.

The scheme, which is administered jointly by the Australian Taxation Office (ATO) and AusIndustry, provides entities with a tax offset not only for expenditure but also for the decline in value of depreciating assets used for eligible R&D activities. Depending on a range of factors, a company may wait between 3-15 months to receive their refund.

Certain private finance institutions offer their clients the ability to access their refund during the current financial year.  By accessing a R&D Tax Refund early, a business can:

  • Expedite further R&D activities;

  • Bring forward commercialisation plans;

  • Support further growth;

  • Delay unnecessary financing or equity injections; and/or

  • Satisfy ongoing cash flow requirements.

The 45% R&D Tax Incentive is a refundable tax offset, which means that once a company’s tax liability is reduced to zero, companies may access a cash refund for any unused offset amount if the company is in a tax loss position. To utilise an example:

Company Taxable Position LOSS of $1 million
Eligible R&D Expenditure $1 million
Benefit $450,000 (cash refund)

Why borrow against the R&D Tax Refund rather than raise equity?
By financing the R&D Tax Refund, a company can use non-dilutionary capital to further their product. Raising equity has a material effect on the ownership of a business and any capital expenditure utilising debt preserves the ownership of a company for a future occasion when the product is more mature and a better valuation can be achieved.

Why is debt cheaper than equity?
Multiple factors make debt an attractive funding proposition. These include that:

  • A lender does not have a claim to equity in the business, debt does not dilute the owner's ownership interest in the company.

  • A lender is entitled only to repayment of the agreed-upon principal of the loan plus interest, and has no direct claim on future profits of the business. If the company is successful, the owners reap a larger portion of the rewards than they would if they had sold stock in the company to investors in order to finance the growth.

  • Principal and interest obligations are known amounts which can be forecasted and planned for.

  • Interest on the debt can be deducted on the company's tax return, lowering the actual cost of the loan to the company.

  • The company is not required to send periodic mailings to large numbers of investors, hold periodic meetings of shareholders, and seek the vote of shareholders before taking certain actions.

What sort of financing can private funders offer?
Short Term Funding in Arrears:

  • Funding for current year R&D

  • Funding calculation is:

Total R&D Spend to date – interest cost to repayment = payment to company

  • Please note: No directors’ guarantees, multiple payments made during the year.

Funding in Advance of R&D spend:

  • When business use a research agency e.g. CSIRO, Uni’s, etc.

  • Up to 80% of refund amount for project for current year spend in advance of the spending anything on R&D.

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