As Australia looks to boost productivity through economic reform, research and development (R&D) is back on the national agenda.
But while much of the conversation centres on big business and universities, SMEs are quietly increasing their R&D investment – with limited access to the support they need to thrive.
According to the Business Council of Australia (BCA), small business R&D expenditure grew by 84 per cent between 2012-22, while expenditure by large businesses declined during the same period. The BCA sees this as a sign that large businesses need all the help they can get, arguing that they are a key source of capital and knowledge transfer.
But what about small businesses?
Small businesses need R&D support, too
While small businesses make up the majority of Australian ventures, most R&D spending still goes to large businesses.
According to a 2021 report by AusIndustry and the ATO, SMEs received less than half of R&D expenditure (49 per cent) – despite accounting for the vast majority (88 per cent) of registrations for the R&D Tax Incentive (R&DTI).
Business coach Peter Cheel has seen many small businesses struggle to innovate due to lacking R&D funds.
“Limited margins make it hard to invest in R&D,” said Cheel. “Unlike large enterprises or government agencies, SMEs often lack the deep financial resources needed for sustained innovation.”
Another business owner, Saara Jamieson, criticised the lack of support available to SMEs attempting to commercialise existing research.
“Funding is only available to researchers to run clinical trials and R&D,” said Saara Jamieson, Founder of Cool Beans Underwear. “But when this research is used by a start-up to develop new life changing innovation, there is no funding or support available.”
Reform proposals aim to simplify R&D access
Industry groups are proposing sweeping changes to the R&D system – much of which could have benefits for small companies.
The BCA, alongside major innovators like Cochlear and Atlassian, recently commissioned a report (Unlocking Australia’s R&D Potential) that outlines proposed changes to the R&DTI to boost national productivity and innovation. Key recommendations include:
- A simplified flat-rate R&DTI premium of 18.5 per cent
- Removing the $150 million annual cap on R&D claims
- A concessional 10 per cent tax rate for profits from R&D commercialised in Australia
- More incentives for collaboration between industry and research institutions
- Streamlined compliance and reporting requirements
- Consolidating R&D grants into fewer, nationally significant programs
“Empowering businesses to make R&D investments is critical to making our economy more productive and innovative,” said BCA Chief Executive Bran Black.
Meanwhile, Universities Australia wants more universities to partner with SMEs. In a submission to the Economic Reform Roundtable, it called for universities to provide research, talent, infrastructure and partnerships to help SMEs innovate.
“Australia’s services sector and small to medium businesses are the backbone of our economy, but they’re often underpowered when it comes to innovation,” said Universities Australia Chief Executive Officer Luke Sheehy, “Universities stand ready to help.”
Compliance is a critical barrier for small business
Compliance is a crucial issue for SMEs accessing the R&DTI – A 2021 review of the R&DTI system by the ASBFEO found that many SMEs had R&D claims retrospectively denied – sometimes years later – leading to devastating financial consequences.
“It is therefore critical that wherever possible the program is improved for small and family businesses,” said then Ombudsman Kate Carnell AO. “And that R&DTI risk and compliance activities are conducted as close as possible to when they register their R&D activities and before they claim the benefit with the ATO.”
The Ombudsman recommended better guidance, modernised approaches to compliance, and improvements to the R&D consultant industry.
If you’re planning R&D this year, this recent contribution by an expert breaks down what the ATO expects you to document.
