Funding R&D: spending now, getting the tax offset later

Research and development is the one kind of business spending where you are paying today for something nobody can yet guarantee. A food manufacturer testing a new preservation method, a software company building a prototype, an engineering firm trialling a new alloy: all are paying wages, materials and contractors for work that may or may not pay off.

The Australian system partly makes up for that through a tax offset. The catch is timing. The offset arrives long after the invoices were due. Funding R&D well is mostly about covering that wait and being honest about which parts of the work a lender will support.

What is the real funding problem with R&D?

There are two separate problems, and they need different answers.

1. The timing gap. You spend the money across the year. The tax offset comes after you register the activities, lodge your return and have it processed. For a company with a 30 June year end, the spend in July may not be repaid until well into the following year.
2. The uncertainty gap. Some R&D never produces a sellable product. No lender wants to rely on that outcome for repayment.

The timing gap is a cash flow problem and can be solved with working capital. The uncertainty gap is a risk problem, and is better funded by people prepared to share it: investors, grants, or your own reserves.

How does the R&D tax incentive actually pay out?

In outline (business.gov.au has the full eligibility criteria):

• You carry out eligible R&D activities, which the scheme splits into core activities (the experimental work) and supporting activities (directly related work).
• After the end of your income year, you register the activities with AusIndustry. This has a deadline, so put it in the diary.
• You claim the offset in your company tax return.
• For eligible companies below the turnover threshold, the offset is refundable, meaning you can receive cash even if you owe no tax. Larger companies get a non-refundable offset against tax payable.
• Spending on R&D conducted overseas needs a separate finding.

So the order of cash is: spend, wait, register, lodge, receive. A refund of, say, $120k tells you nothing about what you can spend in the meantime. This is why a well-run R&D business forecasts the refund as a late-arriving receipt in a cash flow forecast, not as income in the month it earns. A 13-week cash flow forecast is the right tool for tracking the dip.

What is changing?

The Government has released draft legislation to reshape the scheme, including proposals to lift the offset rate, restrict refundability to younger companies, raise the turnover threshold and the minimum spend, and to stop supporting activities from qualifying. Per business.gov.au, the changes are scheduled from 1 July 2028 and the current rules apply until then. These are proposals until the law passes, so don’t build a long-range budget around a number that may move. Check the ATO and business.gov.au before relying on any specific figure.

Which finance fits which part of R&D?

Need	Often suits	Notes
Wait for the refund	Working capital loan or line of credit	Repaid when the refund lands
Advance on the expected refund	Specialist R&D refund finance	Depends on the quality of your claim; compare total dollar cost
Lab or workshop equipment	Equipment finance	The asset is the security
Pre-revenue prototype	Grants, investors or founder funds	Lenders need repayment capacity
Commercialising a product already selling	Term loan or stock facility	The sales repay the debt
Larger raise with property available	Secured lending against property	Property is at risk, so size carefully

Banks are often the cheapest source and a good first call if you have a trading business and fit their criteria. If a bank said no because the research is unusual, the revenue is thin or the timing doesn’t suit their process, non-bank lenders judge on different grounds, usually at a higher total cost.

How does a lender see an R&D business?

A lender will not value your invention. They will ask:

• Is the business trading? Revenue from existing products funds the research and carries the repayments.
• What do the bank statements show? Regular income, wages, contractor payments and any previous refund receipts.
• What assets are there? Equipment, property or receivables that can secure the debt.
• How reliable is the claim? If you are asking for finance against the refund, your records, past claims and registration status matter.
• What happens if the research fails? Can the core business still cover the repayments?

The last question is the one to answer in advance. A lender who sees that the core business can carry the debt, with the R&D as upside, is far more comfortable than one asked to rely on the success of a prototype.

What records make the claim bankable?

Records made at the time the work happens. For each project, keep:

• The hypothesis you were testing and why the outcome was not known in advance.
• Time sheets or logs linking named staff to specific activities.
• Contractor agreements and invoices tied to projects.
• Materials purchased and what they were used for.
• Test results, including failed ones.

Strong records do two jobs. They support the offset in a review and they let a finance provider or accountant see exactly how much of your spend is eligible. Sloppy records leave you with a smaller claim and less to borrow against.

An illustrative example

A Victorian manufacturer of agricultural sensors turns over $6m a year from existing products and spends $400k on a new moisture-sensing prototype across the financial year.

• The R&D work is documented from the first week.
• The company expects a refundable offset after it registers and lodges.
• The refund won’t arrive for many months, so it forecasts a cash dip of around $400k that is only partly recovered when the refund lands.
• It arranges a line of credit while its trading statements are strong, uses it to pay for the project over the year, and repays when the offset arrives.
• It finances a new test rig through equipment finance, so the cash stays in the business.

If the prototype fails, the offset still comes (it relates to eligible activity, not success), and the established product line covers the borrowing. A pre-revenue company with the same $400k spend and no trading income would not borrow this way. It would be looking at grants, investors or an advance on a documented claim. The same work calls for different finance depending on what else the business earns.

Debt, grants or equity?

• Debt works when the business already earns and the R&D is a project inside it.
• Grants are competitive and usually reimburse spend or require co-contribution, so they rarely solve cash flow on their own. See government grants for small business and grants vs business loans.
• Equity suits research with an uncertain or long payoff. It costs a share of the future, so see debt vs equity for growing businesses before you sign a term sheet.

Many companies combine all three.

Mistakes to avoid

• Treating the refund as spendable now. It is a late-arriving receipt.
• Missing the registration deadline. The offset depends on it.
• Claiming everything. Routine development and quality work does not automatically count.
• Borrowing against an unproven claim. If the activities aren’t documented, the advance is at risk.
• Using all the credit line on the project. Keep headroom for the business that is paying for it.

If you’re sizing a facility for a project, send us the outline and we’ll see what could work.

Where to from here?

You now know the spend profile, the likely refund and the gap between them. The practical next step is matching the gap to the right facility while your trading looks strong.

The enquiry takes about a minute and doesn’t involve a credit check, so your file stays as it is. We don’t pass your details to a string of lenders. Someone reads your situation and phones you. Tell us what you’re building and when you expect the refund, as accurately as you can, so that the first option raised is the one that fits.

Ask about funding the gap before the refund →