Maximising R&D Tax incentives in Australia, New Zealand, and Singapore: A guide for technology businesses

You’re a pre-revenue technology start-up that is managing your runway. You can extend your runway by leveraging RDTIs. Where do you go?

Australia offers the most generous RDTI at up to 48.5% of qualifying expenditure, which can be realised as a much-needed cash injection into your business.

If you’re contemplating building a predominantly local workforce, New Zealand offers a comparable benefit for small, loss-making firms at up to 43% of qualifying expenditure when you pair the local R&D Tax Incentive and R&D Loss Tax Credit. Your compliance costs may be higher by virtue of having to navigate two separate programs with different criteria. Notably, the latter program requires repayments when certain events (such as the sale of shares or disposal of intellectual property) occur.

Singapore provides a large headline benefit (of up to 51% of qualifying R&D expenditure¹). But there’s a catch: the tax incentive is delivered as an additional deduction, which provides no immediate cash benefit if you are not paying income tax. In contrast, both Australia and New Zealand deliver their incentives as refundable tax credits, which are refunded to taxpayers to the extent that they exceed income tax liabilities (which would be nil if you are a pre-revenue start-up).

^{1. On the first SGD 400,000 of qualifying R&D expenditure; thereafter the marginal R&D tax benefit falls to 25.5%}

You’re turning over more than $20 million but have had a bad year and will be booking a loss. Or maybe you’re in the process of scaling up, have passed this $20 million threshold, but still have a bank of prior year tax losses that you can use to eliminate your current year income tax bill. Which country gives you the highest RDTI?

Unfortunately, Australia and Singapore aren’t going to give you much cash flow support for the current year. Australia’s RDTI will now offer you a non-refundable tax credit at a additional tax benefit rate (up to 16.5%), which you can use to pay down your future income tax bills². As set out above, Singapore will continue to offer an effective tax benefit of up to 51% of qualifying expenditure, delivered as an additional deduction that can also be carried forward to reduce future income tax payable³. So, if you’re forecasting large profits and income tax bills in your local R&D hub in the near future, Singapore may be your most attractive option⁴.

As a general guide, however, New Zealand will be your most attractive option, providing a flat 15% cash benefit on qualifying expenditure (so long as you have sufficient New Zealand-based payroll costs). This benefit could expand to 43% if you meet the additional criteria for the R&D Loss Tax Credit: being unlisted, in a group-wide loss position, and having a predominantly New Zealand-based payroll are some of the key hurdles that you’ll need to jump over.

 ^{2. Subject to satisfying additional tests that broadly relate to continuity of ownership or carrying on a similar business
 3. Subject to satisfying additional tests that broadly relate to continuity of ownership
 4. See other factors in relation to the scope of eligible expenditure and support for overseas R&D}

So, you’re paying income tax. Looking at this optimistically, it’s a good problem to have: it usually indicates that business is going well.

Even better: all three countries now provide an RDTI that delivers an immediate cash benefit to your business (via a reduction in your income tax bill).

Ceteris paribus, Singapore’s RDTI will pay the most for your R&D at up to 51% for the first SGD 400,000 of qualifying expenditure and 25.5% thereafter. This dwarfs the headline benefits offered by Australia (8.5% to 18.5% depending on your size and ratio of R&D to total expenditure) and New Zealand (15% flat).

For large multinational corporations spending big on R&D, Australia may offer a marginally higher benefit. Qualifying R&D expenditure above a threshold (set at 2% of total expenses) attracts a higher 16.5% marginal benefit rate, whereas expenditure below this threshold only attracts an 8.5% marginal benefit. If R&D forms a smaller proportion of your total expense base, the flat 15% benefit offered in New Zealand may be more attractive.

Tax-payable SMEs also enjoy a marginally higher R&D tax benefit in Australia (flat 18.5%) versus New Zealand (flat 15%).

Support for overseas R&D

In a labour-constrained and videoconference-call enabled market, technology firms are increasingly offshoring their development teams. Whilst cost continues to be the dominant factor for offshoring labour, the past few years saw a shortage in skilled software engineers that drove some firms to resource their projects from Europe and broader Asia.

Whilst it requires a separate and upfront approval, expenditure incurred on overseas R&D activities can potentially attract Australian R&D tax benefits. 

Inter alia, where most of the project's costs are Australian-based and overseas personnel are retained due to an inability to source staff of similar expertise in Australia, an R&D entity may be successful in obtaining this approval. The latter criterion has become increasingly easy to demonstrate considering recent labour shortages in the Australian technology space.

Administrative and regulatory burden

Australia’s self-assessment regime provides for fewer upfront reviews but a higher degree of post-claim compliance activity.

Comprising approximately 80% of R&D claims, technology-based R&D claims have historically been subjected to significant regulatory scrutiny and contention. This has largely been driven by interpretive challenges in the scope of eligible R&D activities within the sector.

Whilst post-compliance action resulting in refund clawbacks dampened throughout the pandemic years, the regulators have signalled a return to pre-pandemic levels of compliance activity, including the initiation of random, large business, and specific issue reviews (such as the migration of intangible intellectual property rights).

Technology executives will do well to assess the strength of historical R&D Applications and procure advice on areas of risk. RSM offers complimentary health checks of historical R&D claims and can assist with process improvement recommendations to mitigate compliance risk.

Scope of eligible activities

Technology-based R&D claims have historically endured interpretive challenges and regulatory scrutiny. This is perhaps due to the text of the eligible <core> R&D activity definitions, which still require a 'systematic approach based on the principles of established science'.

Despite this, the Department of Industry, Science, and Resources has noticeably overhauled its approach to administering the program - favouring education-led approaches and increasing the scope of technology sector-specific guidance materials that clarify position on how the raft of criteria and exclusions apply to a Software R&D claim.
 

Scope of eligible expenditure

Broadly, expenditure is eligible to the extent that it is incurred ‘on’ a registered R&D activity. Salary costs, contract expenditure, overheads, and depreciation on assets used to conduct R&D activities may fall within the ambit of an Australian R&DTI claim.

Two carve-outs may be relevant for firms planning a technology investment:

• Software development for the dominant purpose of use in internal administration falls outside the scope of eligible R&D activities. Companies investing in internal technologies without any customer-facing components should be aware of the potential application of this carve-out.
• Broadly, expenditure on ‘core technology’ cannot be eligible R&D expenditure. This encompasses expenditure incurred in acquiring technology for the purpose of obtaining/creating something new based on that technology or extending, continuing, developing, or completing the activities which produced that technology. Note that this exclusion only targets the cost of ‘bringing in’ already developed technology; the cost of further developing the technology or producing something new based on the technology may still qualify under the R&DTI.

Support for overseas R&D

Up to 10% of total eligible expenditure under the NZ RDTI can be overseas expenditure. For technology companies with overseas development staff, the ability to include these costs without additional compliance hurdles reduces administrative overheads and burden.

However, the 10% overseas expenditure cap can limit the overall quantum of the benefit for technology firms with a dispersed/global development team. NZ firms who are offshoring more of their R&D functions, even if this is due to local labour shortages, may enjoy proportionately lower R&D tax benefits. 

Administrative and regulatory burden

In New Zealand, the general approval process provides certainty upfront, which is aided by regulators' supportive approach. Regulators strike a good balance between supporting innovation and ensuring compliance - performing their own due diligence checks on public information and relying on industry experts to fact-check application information. This is perhaps driven by a broader policy objective of increasing NZ’s Business Expenditure on R&D (BERD) to 2% of GDP (from 0.86% as of 2022).

As the program has matured, so to has the approach to compliance reviews. Larger claimants can expect longer lead times and a higher quantum of information requests to validate their R&D tax credit entitlement.

Scope of eligible activities

The inclusion of technological (in addition to scientific) uncertainty, and the requirement for a systematic approach (instead of a scientific one) has lent itself well to the application of the R&D activity criteria to technology-based R&D claims.

The NZ R&DTI boasts extensive guidance material and a broad recognition of technological uncertainty (for example, applying an existing collection of technology to a new problem).

Scope of eligible expenditure

Like the Australian regime, salary costs, contract expenditure, overheads, and depreciation on assets used to conduct R&D activities may fall within the scope of an NZ R&DTI claim.

Software development for the purpose of internal administration of a business is ineligible for the R&DTI. This does not include software development for non-administrative internal purposes which is subject to a $25 million cap.

Relevantly, expenditure incurred on R&D activities conducted in conjunction with commercial activities may be subject to additional restrictions. Technology firms conducting R&D activities in connection with client projects should consider whether the ‘commercial production rule’ applies to limit its eligible expenditure.

Support for overseas R&D

The Singapore RDTI does not provide any additional tax benefit on expenditure incurred on R&D conducted overseas. A standard tax deduction on that expenditure may be available where the overseas R&D is related to the Singapore entity’s trade.

Administrative and regulatory burden

Anecdotally, some taxpayers have reported long delays (>2 years) and unfavourable outcomes in their Singapore RDTI claims.

On closer examination, the majority of R&D claims are processed with no variation – with more than 80% of SME claims being granted full benefits.

The key differentiator is in the level of information submitted in the initial RDTI claim form. Whilst it operates under self-assessment principles, RDTI claims that exhibit non-compliance risk flags or lack the requisite information to inform an eligibility assessment can expect significant delays (or a protective assessment to deny the entirety of R&D tax benefits whilst a formal review is completed).

We find that providing the right type of information upfront significantly mitigates the risk of review and delays.

A focus on commercial objectives and assertions without evidence are likely to land you in a protracted R&D review in Singapore.

Appropriate engagement with literature reviews, patent searches, and market scans in preliminary submissions can significantly mitigate review and delay risk.

RSM can advise on documentation and claim submission approaches that minimise the risk of delay and claim adjustments.

Scope of eligible activities

Like other RDTIs, Singapore features the three classic limbs of qualifying R&D projects: novelty, technical risk, and a systematic approach.

All qualifying R&D projects must have an objective to create new or improve existing products or processes. Qualifying R&D projects in Singapore must also involve a systematic, investigative, and experimental (SIE) study in a field of science or technology: it must be planned, structured, and address a clearly defined (scientific or technological) knowledge gap.

In addition to the objective and SIE study requirements above, claimants must show that their R&D projects involve novelty or technical risk. Practically however, this final limb is a natural extension of demonstrating that the objective and SIE study requirements are met.

Scope of eligible expenditure

Qualifying expenditure in Singapore is more narrowly defined.

Expenditure that attracts additional R&D tax benefits is restricted to staff costs, contractor costs, and consumables used directly in R&D projects (albeit at a significantly higher marginal rate than Australia and New Zealand).

Key winners

• Pre-revenue and loss-making technology firms turning over less than AUD $20m (cash benefit of up to 48.5%).
• Technology firms with project expenditure largely based in Australia, who require access to overseas expertise due to labour shortages (benefit may be available on overseas costs).

Key losers

• Technology firms in a tax loss position, turning over AUD $20m or over (benefit is a non-refundable offset that can only be used to reduce future income tax liabilities).
   

Key winners

• Technology firms of all sizes that have a large local R&D headcount, and a small offshore R&D headcount which comprises <10% of its total R&D expenditure (benefit of 15% - 43% on qualifying expenditure)

Key losers

• Technology firms offshoring a large proportion of their R&D/development teams (15% benefit available on eligible New Zealand-based expenditure)

Key winners

• Technology firms with Singapore-based labour costs and income tax liabilities (cash benefit of up to 51%)

Key losers

• Loss-making technology firms (i.e., firms not currently in an income tax payable position in Singapore) (benefit is an additional deduction that can only be used to reduce future income tax liabilities).