Home Articles Three reasons to choose R&D tax money over grant money

Three reasons to choose R&D tax money over grant money


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Government money is one of the best funding sources for a company seeking to put itself beyond the norm in the name of technology advancement.

Generally, in Australia, there are two main types of government funds available: Government Grants and Research and Development Tax Breaks.

There can be a lot of appeal in trying to access Government Grants due to the funding amount being often up to 50% of a project’s value.

This represents money that you don’t otherwise have to come up with and can certainly lessen the financial burden of an investment into new technology.

However, grants do have their downsides too, and if I had to pick a government funding program for my business, I know which one I would choose: R&D Tax Breaks.

Here’s why.

1. R&D tax money is guaranteed and grants are pot luck

If you are in the technology development space, it is assumed that you have eligibility for the R&D Tax Offset program.

Submit two forms at tax time and your R&D Tax Money is guaranteed.

On the other hand, you could spend months preparing a grant application for grant funding only to be knocked back by the assessors at the end of it all.

In fact, Commercialisation Australia’s programs are currently putting through less than 15% of all applications. That is a pretty poor success rate and could mean that a lot of your time and money have been wasted for no funding result.

2. R&D tax money is tax free while grant money is taxed

When your tax cheque arrives in the mail, your company can bank it as is and then spend it on whatever you like.

On the other hand, your Grant money is classed as “Assessable Income” in your Company Tax Return, which can bite at tax time and possibly lead to a bigger tax bill than anticipated.  I have clients that have faced this problem.

With the R&D Tax Offset benefit being 37.5% and potentially rising to 45% in 2012, and the after-tax benefit of a 50% Grant being as low as 35%, I know which money I would rather have.

3. R&D tax money is spent as you like; grant money is spent as per the grant agreement terms

You may not realise that R&D Tax Money is provided by the Government on a purely market-driven basis.

This means that you and your company are in full control of your projects and the directions they head in, and as long as you still meet the definition of R&D, you can still claim each year.

On the other hand, if you have somehow lined up your resources to commence your project when the Government Grant money comes in, you must follow the terms of your Grant Agreement for the way your project progresses which can make it difficult to adjust to changing market forces and project needs.

But wait… what if I can’t choose one over the other?

Now, these are three great reasons as to why I would choose R&D Tax Money over Grant Money. However, if you still decide that Grants are for you, let me share one last piece of advice: you can do BOTH.

Yes, it is possible to get a Government Grant and also claim the R&D Tax Offset for the same project.

This is because of a tax provision called ‘clawback’.

Basically, there is a formula that you apply when submitting your R&D Tax Claim to take into account any grants that you have received. What this does is reduce the amount of your R&D Tax Offset benefit from 37.5% to 30%. But you can still receive that 30% as cash, which can be a nice little kicker to your project and company.

If you would like to investigate Government Grants further, I can suggest a fairly comprehensive website called Grantslink (www.grantslink.gov.au).  And if you would like to check out R&D Tax Breaks and specifically the cash-friendly R&D Tax Offset program out further, I can definitely suggest you go to my business: www.smarttax.com.au.

And good luck!

Caroline Hughes is managing director of R&D Smart Tax. R&D Smart was ranked first place in the Anthill SMART 100 Index in 2010. More about the company can be found at www.smarttax.com.au.

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