R&D Tax – Receiving 43.5c per dollar back on a bad investment is still a loss
Posted 3 years ago
If your business is involved in research and development (R&D) activities, no doubt you received numerous emails after the federal budget was released. While offsetting the risk of R&D through the R&D tax incentive program is definitely beneficial, many organisations are more interested in the documentation required to obtain the tax incentive, rather than the planning documents that determine whether the R&D will actually help to develop a profitable product or service.
Now don’t get me wrong – it is important to have the compliance documentation. But it is equally important to have the internal checks and balances in place to make informed R&D decisions. Too many times I have seen organisations making critical decisions with far-reaching consequences on minimal evidence. The decision to adjust, fund or stop a project needs to be made strategically and based on data, not gut feel.
The lack of an internal decision-making framework to measure progress and performance sees organisations continuing to fund research in situations where it is unlikely that they will obtain a return on investment. What may have been a feasible R&D project in the past can be altered by a change in the organisations’ strategy, change in personnel, competitor products entering the market, or a major change in the operating environment (take COVID-19 as an example). There is often a false sense of security that ‘it is OK, this expenditure complies with R&D tax incentive requirements’. The problem with this thinking is that while you might for example receive 43.5c in the dollar back through the R&D tax incentive (depending on the organisation), you are essentially losing 56.5c in the dollar if you are investing in projects that won’t help your business. Let’s expand this thinking, if you spend $100,000 on R&D you stand to waste $56,500.
R&D is, by its definition, risky. There are a number of reasons why a project might fail. The aim, however, is to reduce the risk of failure by having robust internal decision-making frameworks in place. This enables the organisation to be better prepared and where possible, pre-empt product and service commercialisation challenges.
To get a feel for what we mean by an internal decision-making framework, here is a summary version of our Commercialisation Navigator™ tool with just 10 questions (the full tool is much more comprehensive). As a start, if you can confidently answer ‘Yes’ to each of these questions, then your R&D project is likely on track. If you can’t, it might be worthwhile reassessing your R&D project plans.
- Have you checked competitor products and services within the last 3 months?
- Do you understand your customers decision making process – who makes the decision, do they really have a problem? What would convince them to change products or services?
- Can you list all manufacturing, development, or supply chain partners you will need?
- Do you understand the full cost of production including supply chain costs?
- Does your price point create value for customers and enough margin for your business?
- Do you have a cost-effective IP management strategy?
- Have you identified regulatory or legislative requirements in each target market (incl on a state basis)?
- Do you have an itemised budget for the project covering validation, regulatory, IP management, marketing etc.?
- Do you have the capital required to succeed in each target market?
- Do you have a list of key ‘idea failure points’ that you continually assess?
There is no ‘set and forget’ in the world of commercialisation and R&D. To ensure you are not wasting money and resources, it is essential to continually map, monitor and check your progress according to a framework. My best advice? Make sure you have your decision-making framework in place before you go chasing those R&D tax incentives.
Reach out if you would like any assistance getting your framework in place.
Author: Brian Ruddle, Managing Director of Impact Innovation Group.