R&D Pre-payments: Benefit today

Article written by: Ayla Kremb, Fundraising Specialist @ Catalyst Solutions ASPAC

In our work with start-ups and small businesses we have learned that cashflow is always a pain point for the leadership team. Most companies are not aware that this challenge can be aided by tapping into the ‘Prepaid Expenditure’ provisions as part of the R&D Tax Incentive.

In a nutshell, this provision allows companies that are conducting R&D to claim certain costs which they prepay in the current financial year yet will be utilising into the following financial year.  This increases their R&D Tax Incentive benefit for their current claim.

There are specific conditions covering these prepayments, and they stipulate that “a prepaid expense is expenditure you incur under an agreement for something to be done (in whole or in part) in a later income year.”

For example, Tech Co. Pty Ltd leases an R&D lab and prepays $100,000 for the lease on 1 January 2017 to cover the rental period from 1 January 2017 to 31 December 2017, and the lab is used exclusively for R&D purposes.

Ordinarily, Tech Co. Pty Ltd would only claim $50,000 of the lab lease expense as part of its FY2017 R&D Tax Incentive claim (i.e. relating to the period 1 January 2017 to 30 June 2017), with the remaining $50,000 (i.e. relating to the period 1 July 2017 to 31 December 2017) being included within its FY2018 R&D Tax Incentive claim.

What the prepayment provisions enable is for the entire $100,000 to be included within the FY2017 R&D Tax Incentive calculation.

Care must be taken when applying the prepayment provisions, as the following are not allowed to be included:

  • Expenses incurred over a time period of more than 12 months
  • Amounts of less than $1,000 (excluding input tax credits)
  • Amounts required to be incurred by a court order or law of the Commonwealth, state or territory
  • Payments of salary or wages (under a contract of service)
  • Amounts that are capital, private or domestic in nature (except certain research and development amounts)
  • Certain amounts incurred by a general insurance company in connection with the issue of policies or the payment of reinsurance premiums.

Since identifying how to get the most out of the R&D Tax Incentive is not always straightforward, our team at Catalyst Solutions is happy to dive into the details with you. Feel free to get in touch at ayla@catalystsolutions.com.au for a chat.