Accessing funding to fuel your business’s growth can often feel like navigating a maze. But if you’re investing in research and development (R&D), you may already be on the right track to unlocking early-stage funding through R&D finance. Before diving in, it’s important to understand the connection between R&D finance and the R&D Tax Incentive, and whether your business meets the necessary criteria. This quick checklist will help you assess your R&D tax incentive eligibility and make informed decisions.
Understanding R&D Finance and the R&D Tax Incentive
R&D finance provides businesses with early access to their expected R&D Tax Incentive rebate. Rather than waiting until tax time to receive the government rebate, companies can borrow against the eligible R&D expenses they’ve already incurred within the financial year. It’s not a replacement for the R&D Tax Incentive (R&DTI) but a financial bridge that leverages it.
To be clear: R&D finance is only available to businesses that plan to claim the R&D Tax Incentive. So understanding your R&D tax incentive eligibility is the first step.
This is particularly relevant for income years starting from July 2021, as updates to the program have refined how core R&D activities and expenditure are assessed by the government.
Checklist: Are You Eligible for R&D Finance?
Use this checklist to determine if your business is eligible for R&D finance:
1. You Are an Australian Company
Only companies that are incorporated in Australia and operating under Australian corporate law are eligible. Trusts, sole traders and partnerships are not eligible for the R&DTI or R&D finance.
The company must also be considered an Australian resident for tax purposes to meet the criteria.
2. You Are Undertaking Eligible R&D Activities
Your business must be conducting eligible R&D activities as defined by the R&D Tax Incentive program. These typically include:
- Systematic experimentation to generate new knowledge
- Development of new or improved products, processes or services
- Technical uncertainty that requires investigation or testing
These are known as core R&D activities and must be scientific or technological in nature and aim to produce new knowledge.
3. You Have Incurred Eligible R&D Expenses This Financial Year
R&D finance is based on your accrued R&D expenditure to date in the current financial year. You must have already spent money on eligible activities. Rocking Horse, for example, does not lend based on future projections.
Eligible expenses can include wages for R&D staff, contractor fees, cost of materials, and overheads directly related to R&D work.
This is evaluated per income year and aligns with your broader income tax obligations.
4. You Intend to Lodge an R&D Tax Incentive Claim
While you don’t need to have already lodged your R&D Tax Incentive claim, you must intend to do so. Lenders providing R&D finance will expect that you’re on track to complete the R&D claim process and eventually receive your rebate from the government as part of your company tax return.
5. You Are Claiming the Refundable Offset (Not Just the Non-Refundable Offset)
R&D finance is typically suited to companies that qualify for the refundable R&D tax offset. This usually applies to companies with an aggregated turnover of less than $20 million. Companies claiming only the non-refundable offset may not be eligible for finance, as there’s no rebate to lend against.
This refundable tax mechanism is what enables access to early-stage R&D finance for eligible businesses.
6. You Have Clean Financials and No Major Tax Liabilities
Most R&D finance providers will want to see that your business is in good financial health. This means having up-to-date financials, no major outstanding tax debts, and a viable path to receiving the R&D rebate.
This includes being current with your income tax lodgements and other compliance obligations as a registered R&D entity.
7. You Can Provide Supporting Documentation
To proceed with R&D finance, you’ll need to demonstrate your R&D activities and related expenditure. This might include:
- Timesheets for R&D staff
- Invoices and contracts for R&D work
- Project plans, technical documentation or lab notes
The more comprehensive your records, the smoother the finance process will be.
What R&D Finance Is Not
To avoid confusion, here are a few common misconceptions:
- It is not an alternative to the R&D Tax Incentive: You must be planning to claim the R&DTI.
- It is not based on future spend: Only expenses already incurred can be financed.
- It does not restrict how you use the funds: You can spend the loan on R&D or other business operations.
Ready to Unlock Capital from Your R&D Spend?
Understanding your R&D tax incentive eligibility is the key to accessing R&D finance. If your business is conducting eligible R&D and has already started spending, you might be in a strong position to benefit from this financial strategy. Use the checklist above to evaluate your situation and speak with a specialist finance provider like Rocking Horse to explore your options.
Unlocking your R&D rebate ahead of schedule could be just what your business needs to reach its next milestone.