Tim Benbow on Business Incentives and Arrangements for Startups

Tim Benbow on Business Incentives and Arrangements for Startups

Tim Benbow, Director of R&D and Technology at Ernst & Young, introduced his Sydstart workshop with this statement: "If you see an accounting firm doing a presentation at a startup conference, you might think it's going to be a bit dull, but hopefully I'll keep you interested for 20 minutes or so. What I want to do today is just run through a number of things that we've been finding really recently that help companies who are in the startup phase."

Tim started off with the R&D Tax Incentive, and then moved on to other government grants. He also touched on other ideas that can potentially be of huge help to startups. Here's the rundown.

The R&D Tax Incentive

This is the one thing that's absolutely vital for startups, especially tech startups in the first few years. It's the one government grant that keeps the startups (that Ernst & Young work with) going through those early years, and Tim said that this program has been phenomenal for many, many of his clients.

The R&D Tax Incentive has been around in one form or another in Australia since 1986. Basically, for the companies who are doing R&D – research and development – developing technology of some form, the government will refund some of the money spent. If you are a small company and you're not part of a large group – whether it's an Australian group or global group – if you're a small company in a startup phase (turning over less than 20 million dollars), what you can actually do is whatever you spend on developing technology, the government could potentially refund you up to 44 cents on the dollar. That's a huge incentive to help a company get going during that startup phase. It's 44 cents on the dollar depending on whether a company's tax-paying or in a loss position, but if you're investing in early stage startup pre-revenue especially, it's a good source of income.

To be eligible, you need to be doing eligible activities. They need to be based around a scientific development method, so some idea of a progression of activities – what the program calls experimental activities. They go from a hypothesis or an idea or a concept, through to doing something to test that. It could be writing software, it could be developing new algorithms, it could be integrating systems in ways that couldn't be done before. It could be looking at new data storage techniques, new communication protocols – some sort of idea and then you go and test that idea and figure something out that you couldn't know until you went into those activities.

According to Tim, those experimental activities need to be testing an idea that was previously untested. Or maybe someone else has tested it but they won't tell you the results. So a large corporate could've developed something, a competitor, somebody else may have developed something but if you can't access that information either through an Internet search or a literature search, talking to peers or colleagues or people who know the industry, then it's what we call knowledge that is not available, therefore you need to do some activities to generate the same knowledge or that new knowledge. These activities have to be undertaken an an attempt to come up with some new knowledge. The new knowledge could be just learning something new. It could be a new product, it could be a new process, new device, a new service, a new capability – something that is new to you and you couldn't have known beforehand.

  • How does the program work? The program's administered by two government agencies. One is AusIndustry, which cares about the question of "Is it R&D? Does it meet the requirement of this program?" The other is the tax office, which looks after the expenditure side. For a company to access this incentive you need to put an application in to AusIndustry first and then the benefit, the expenditure is claimed in the company's tax return.     
  • What is the process like? Preparing an application, lodging an application, and getting confirmation that you've lodged your application with AusIndustry takes a couple of weeks. Lodging a tax return and the tax office usually pays out the money within four to six weeks, depending if there's any other questions. Companies have got 10 months after the yearend to access this incentive.     

What's important to remember is that companies must maintain records to evidence R&D activities and expenditure. This is part of a significant incentive program that the Australian government runs At the moment, the Australian government's paying out about 3 billion dollars a year through this program and 2 billion out of that 3 billion is going to the refundable, the small grants to startup companies. So as a result, the government looks closely at it.

What makes this different from the other grants is that it's an incentive that gets administered through the tax program. As a company, you assess yourself – do you think you're eligible? You're putting an application in and effectively it just gets rubber-stamped through the process. And unless somebody in one of the regulating authorities thinks something's not right with it, it'll just get rubber-stamped and as a result you'll get your refund. Saying that, the two regulating bodies can come back at any time during the next four years and do a detailed audit on any claims that have been made. The other grants are discretionary grants. The company makes an application and it goes through an assessment process. So effectively the government does most of the review and the assessment before they'll pay any money.

Other Government Grants

1. Entrepreneurs' Programme

This has got multiple funding streams through it. There is a number of opportunities to get advisers and commercialization advisers involved in a business, to review business plans, review marketing plans. And that's been really good for companies who are looking for that assistance so this program will contribute money towards getting those reviews done. They will also provide money to bridge the gap effectively between developing a technology or proving a concept through to first sales. So it's about bridging that commercialization gap. It will provide grants of up to one million dollars on a dollar for dollar match funding basis for ideas and concepts that have been proven, but they just need that assistance to get to market.

  • What is the process like? Have an idea. Fill out a brief form called an expression of interest that gets submitted with the government. You get invited to sit before a panel of advisers and you effectively pitch your commercialization idea. From there you could be invited to a full application, and if successful, you'll get your funding that way.     

2. Export Market Development Grant

This is a program administered by AusTrade, and as its name suggests, it's all about promoting export sales or the development of export markets beyond Australia. Unfortunately, New Zealand isn't considered an export market for some reason under this program, so if you're exporting to New Zealand or want to build a market in New Zealand, it doesn't count. There's a couple of other exclusions like Iran and Syria.

You go and spend your money developing export market – you could be developing a website specifically for export market sales, could be about promotional activities offshore, engaging a marketing agent, even obtaining patents before you release your product globally, travel to go overseas, trade shows overseas. All sorts of activities can qualify for this program. The first 5000 dollars you need to spend our of your own pocket, and then the next 300,000 that you spend, the government or AusTrade will reimburse you up to half of that next 300,000 dollars. Similar to the next R&D Tax Incentive, you access it after the year has ended.

3. NSW Jobs Action Plan Rebate

This is for companies who are paying payroll tax. Back in 2011, the New South Wales government sent out this incentive to encourage jobs within Australia so any company or organization that's employing people – it could be a trust, it could be a company structure that's employing people – if you are increasing the number of staff through this program at your year one milestone you'll be given a grant of 2000 dollars. At your second year milestone, they'll give you a grant of 3000 dollars. You have to lodge or notify that you've employed a new person pretty immediately after they've started.

4. Small Business Grant for new employees
If you're small enough and you're not large enough that you're paying sufficient salary to pay payroll tax in New South Wales, this program here will give you a grant for simply employing somebody. So after you've had someone who's been an employee for one year, you can get a grant of 2000 dollars.


This is how some of these different programs fit within the different life cycles of an organization or as a startup as it's moving through development.

Other Ideas to Assist Startups

There are other ideas that would benefit startups in different scales. Some of these are helping cashflow, some of them are actually preparing them for being ready for a transaction.

1. GST Input Tax Credit Acceleration and Automation

Every quarter or monthly, a company can lodge their base statement for operations. You get credit when you buy some services or goods – there's GST that's payable on that. As long as your expenses are greater than any GST that you're charging at you can get a refund on that GST from the government.

2. Employee Share Schemes

In effect they can potentially issue shares to employees with no taxable amounts upfront. It does cost a little bit to set up an employee share scheme because there's a number of legal documents that need to be put in place, but the effect of that is potentially that's the way you can renumerate your staff and potentially reducing the actual cash payment required in a startup company.

3. Corporate Structuring

When should a company incorporate and at what point and why do it because there comes additional compliance requirements, rather than just being someone generating an idea and working on an idea?The biggest thing is thinking about it from an R&D perspective, but secondly from an investor-ready perspective. It's important that the business is in a structure that's attractive to an investor.

4. Corporate and Tax Compliance

There needs to be a level of trust in an organization or systems or process that an organization has to deem absolute top dollar when it comes to investment.

5. IP Management

It's important that IP is managed and protected.

Get access to Tim's full workshop with a Digital Pass.