Eco Investor December 2014

Unlisted Companies

Quarterly and Half Yearly Prepayment of R&D Tax Refund

Companies that find the Federal Government's R&D Tax Incentive useful for managing cashflow can now access a quarterly and half yearly pre-payment service instead of having to wait a full year between refunds.

The R&D Tax Incentive is a 45 per cent refund on eligible R&D to companies with less than $20 million in turnover. The refund is useful for pre-revenue and pre-profit companies to manage their cashflow and reduce their need to raise new capital. But the refunds are annual and some companies can benefit from accessing the refund more quickly or regularly.

Financial services consultancy TCF Services has developed an R&D Tax Incentive Prepayment Service where it will prepay up to 80 per cent of the R&D tax refund on a short term, quarterly or half yearly basis.

The money is provided as a loan, and TCF uses the prospective refund as security.

A condition of the loan is that the ATO refund payment is redirected to TCF. When the ATO sends the refund, TCF netts off the loan amount, the establishment and annual service fees, and the interest, with any remaining balance then refunded to the client.

The service is prompt. The first payment can be processed within 48 hours of the due diligence being met and the loan agreement being executed. Further drawdowns take place against agreed milestones and budgets being met. Ongoing due diligence is to confirm that the company is trading within the requirements of the loan agreement.

Working out how much a company can receive under the prepayment service is simple. For example, an eligible quarterly R&D expenditure of $200,000 gives a tax loss at 45 per cent of $90,000, and an 80 per cent prepayment of this is $72,000.

There is an establishment fee of between 3 to 5 per cent of the initial prepayment amount and which is capped at $10,000, and an annual service fee of $1,000 to $2,500 to cover ongoing due diligence. The interest rate depends on the size of the loan and varies between 1.25 and 1.5 per cent per month.

TCF also does the claim preparation, lodgement and compliance work for the R&D Tax Incentive and there is a fee for this.

TCF Services was launched by managing director Gerry Frittmann in 1991, and since then the company has helped deliver over $2 billion in Government grants and tax incentives for companies across a number of sectors including software and digital technology, automotive, food, apparel and manufacturing. The company also operates in cleantech.

Two pieces of advice Mr Frittmann offers to entrepreneurs is for founders who spend almost all of their time on eligible R&D activities to pay themselves a wage so they can get any benefit from the R&D Tax incentive, and for entrepreneurs to be smarter about how they use sweat equity.

Founders who do full time R&D and don't pay themselves wages can't benefit from the R&D Tax Incentive. Instead, they should pay the tax and super on a gross wage by June each year and then loan the after tax proceeds of the wage back to the company. This means they can claim 45 per cent of the gross wage and super and still have 80 per cent of the cash available to the company.

Founders who offer sweat equity to an external software developer can also miss out on the R&D Tax Incentive benefits. Instead they should pay the developer their usual fee and ask them to buy the shares in the start-up, which can allow the start-up to claim 45 per cent of the fee and still have the equity funds.

Search Eco Investor