Tax Incentives vs Grants

A brief review of Government support for your investment in Innovation

There are two main policy mechanisms the Government currently uses to financially support innovation projects. These are incentives provided through the tax system (R&D Tax Incentive, ESIC tax incentives) and direct funding (various targeted grant programs). This article provides analysis of the relative advantages of the different forms of Government support for innovation that are currently available.

Tax Incentives

The Government operates several tax incentives to support investment in innovation. These programs provide tax benefits to companies or individuals within Australia’s innovation ecosystem and therefore are a form of indirect support for innovation.

 The two most prominent incentives in this space are:

•  the R&D Tax Incentive (RDTI), which is the Federal Government’s flagship program for supporting Australian industry innovation, providing around $3 billion annually to companies where they have undertaken eligible R&D activities, and

• the early stage investor tax incentive, which supports investment in an eligible early stage innovation company (ESIC) by providing investors with annual tax offsets of up to $200,000 as well as advantageous capital gains tax treatment.

There are many misconceptions about tax incentive programs for supporting innovation. For example, the view that incentives are restricted to supporting ‘world’s first’ innovations, or that they involve competition for a limited pool of funds, similar to how grants operate.

Provided below is a summary of the key advantages provided by a tax incentive model for supporting business investment in R&D and innovation.

Advantages of Tax Incentives

• Consistent form of support, available annually – tax incentives supporting innovation are available to companies annually and are not restricted to narrow timeframes for application like most grants. As a result, accessing tax incentives should form an important part of your annual business and R&D expenditure planning.

• Entitlement-based and self-assessed – essentially if you can establish you are eligible, you can claim the tax incentives that are available annually, albeit ensuring that you are able to substantiate the scope of eligible activities and costs being claimed as per other tax deductions. 

• Non-competitive – unlike a Government grant, there is not a limited pool of funds for which applications are assessed competitively. Rather, if you meet the criteria, you can access the benefits available. This provides companies and individuals with greater confidence in the money that will be recouped or kept in the business each year.

• Industry and geographically agnostic – unlike grants which are typically targeted at specific business sectors, a current ‘buzz worthy’ cause, or a specific region/locality, tax incentives have annual application to taxpayers across Australia in all industries. For example, innovative activities eligible for tax incentive support can span industries as diverse as mining & resources, life & health sciences, manufacturing & engineering, agribusiness & food production, waste management, software & technology, etc.

Federal & State Government Grants

Government financial support for R&D and innovation is also provided at both the Federal and State level via direct grant programs. These programs can provide significant cash injections to support business investment in innovation, although these forms of support often have a narrower focus and are more specifically geared towards certain types of businesses (e.g. SMEs), particular industries or types of activities, or have time restrictions for preparing and lodging the grant application. 

Advantages of Direct Government Grants

Direct funding model and ‘bang for your buck’ – Government grants provide direct cash injections and often more generous funding support than those provided via indirect Tax Incentives. In addition, some grant funds encompass costs that are not eligible for Tax Incentives via the RDTI – e.g. capital expenses.

Scope of support – direct grant funding is offered via multiple grant programs at both Federal, State and even Local Government level. Whilst these programs are updated frequently and therefore may not have extended windows of opportunity, at any one time there are typically numerous separate programs being offered.

Reduced administrative & compliance burden – although some grant programs necessitate documents and reports to be generated to secure funding, they are typically easier to navigate in terms of eligibility assessment and the application process as compared with tax incentives which are entrenched in tax legislation and encompass various eligibility criteria, ongoing compliance requirements, and the spectre of ATO review multiple years after receiving the incentive.

Summary

There is no doubt that both models of Government support for innovation - indirect support via tax incentives and direct funding via government grants - play an important role in rewarding Australian businesses willing to invest in R&D and innovation.   

The key takeaway is to make sure that your business is armed with enough knowledge to navigate when and how the different Government support mechanisms can apply to the projects your business is pursuing or those being planned for the future. Developing a strategy and getting expert input into how government support can be best leveraged to maximise the return to your business is a prudent approach, particularly in the current ‘cash is king’ climate.  

If you would like to learn more or discuss your strategy then please don’t hesitate to reach out.