The Risk to Future Dividends When Receiving R&D Grants

The Risk to Future Dividends When Receiving R&D Grants

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R&D grants provided by the government are an attractive incentive for Australian startups, especially those that burning cash with large R&D budgets. But, accepting them has some ramifications on your future dividends that owners and investors may not be aware of. 

The basics of R&D grants in Australia

The Australian government created a programme that provides incentives for companies that have significant R&D expenditures. The incentive can take several forms, but typically companies that have spent at least $20,000 on 'eligible' R&D expenditures can receive up to 43.5% back on every eligible dollar in a tax offset that comes as a cash refund. The purpose of this grant is to encourage R&D expenditure for businesses, especially startups, that are spending considerable cash attempting to commercialise their products in Australia, without the ability to offset those expenditures through product sales.

This often seems like an incredible incentive when your startup is burning through cash at a quick pace early in its development, however, the situation can take a turn once your business becomes profitable, and you start to pay out dividends to shareholders and try to utilise your franking credits.

How claiming R&D grants affects franking credits

Franking credits are earned tax credits that enable a company to filter their paid corporate taxes down to shareholders. The shareholders receive credit for the tax already paid by the company, thereby reducing or eliminating their liability.

The rebates taken as a part of the R&D grants are calculated as debits in a company’s franking account - or a negative balance in your available franking credits. Therefore, your company may NOT be able to pass through the tax it has paid once it become profitable, creating a possible double taxation environment for both the company and it's shareholders.

Tax liabilities when utilising R&D refund money

Essentially, shareholders of a company may be taxed twice in the absence of franking credits. Company income is taxed at the applicable rate, reducing net profit. Dividends are then paid to shareholders out of after-tax profit, and shareholders must again pay tax on these dividends. 

Managing your blind spots

This is another example of where businesses don't know what they don't know. It’s vital for entrepreneurs and investors to be aware of the impact that applying for R&D grant incentives can have once the company becomes profitable. There are no ways to skirt the issue, company stakeholders need to have as much information as possible in order to make the right decision for their business. 

At Nine Advisory, we have built a program that helps 7 figure businesses manage blind spots, eliminate competition, build process and take action to launch them into 8+ figure revenue businesses.

If you are looking for proactive advisors that can help you navigate situations like these, contact us here. Our structured program will provide you with a wealth of resources and provide guidance that empowers you to take your business to the next level.


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How claiming R&D grants affects franking credits

Franking credits are earned tax credits that enable a company to filter their paid corporate taxes down to shareholders. The shareholders receive credit for the tax already paid by the company, thereby reducing or eliminating their liability.

The rebates taken as a part of the R&D grants are calculated as debits in a company’s franking account - or a negative balance in your available franking credits. Therefore, your company may NOT be able to pass through the tax it has paid once it become profitable, creating a possible double taxation environment for both the company and it's shareholders.

Tax liabilities when utilising R&D refund money

Essentially, shareholders of a company may be taxed twice in the absence of franking credits. Company income is taxed at the applicable rate, reducing net profit. Dividends are then paid to shareholders out of after-tax profit, and shareholders must again pay tax on these dividends. 

Making the right decisions for a startup

It’s vital for entrepreneurs and investors to be aware of the impact that applying for R&D grant incentives can have once the company becomes profitable. There are no ways to skirt the issue, so company stakeholders need to have as much information as possible in order to make the right decision for their business. The R&D incentives can still be incredibly beneficial to many startups, even when taking the loss of franking credits down the line into account. Many small businesses wouldn’t be able to shoulder continual large R&D expenditures without the tax credits. It’s up to you to understand how they will affect your future profits and use this information to maintain effective investor relations.

If you are looking for a Sydney business advisor that can help you navigate situation like these, contact us here. Our SME experts can provide you with a wealth of resources and provide guidance that empower you to get the most out of your business. 

 

 
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