Is Your Business Structure Locking You Out of R&D Tax Incentives

Sole traders, partnerships and most trusts are legally barred from claiming the R&D Tax Incentive, and thousands of Australian businesses miss out on government grant funding every year because of it.

The Australian Government runs nearly 2,000 grant programs worth more than $80 billion a year, with over $50 billion of that earmarked specifically for business grants.

Businesses structured as sole traders, partnerships or ordinary trusts can be legally shut out of a large share of it. The programs back manufacturing and infrastructure, medical and biotech, clean energy, export expansion, and technical product development.

Cochlear Ltd is one of the Australian success stories built partly on early government grant support. Every year, thousands of innovative businesses miss out on the same kind of funding, and the most common reason is that their business structure makes them legally ineligible.

Sole traders are locked out of the R&D tax offset from day one.

For a business earning between $0 and $200,000, operating as a sole trader is practical. It carries minimal compliance, no corporate entity fees, and the lowest administrative burden of any structure.

But a sole trader developing a new product, software application, device or industrial process is walking into a trap. The R&D Tax Incentive is Australia’s flagship program for encouraging innovation, and under the 2026-27 Federal Budget the refundable R&D Tax Offset rose to 48%. For every $100,000 spent on eligible R&D activities, the government can refund up to $48,000 in cash.

Only “corporate tax entities” can register R&D activities and claim the offset. Sole traders, partnerships and most ordinary trusts cannot.

A sole trader who spends $80,000 testing prototypes, writing proprietary code or formulating chemical compounds gets none of the 48% refund. That’s $38,400 left on the table because of a structural box ticked when the ABN was registered.

Trusts create a funding hurdle of their own

Many accountants advise growing businesses to move into a family trust or unit trust, and trusts are a solid vehicle for asset protection and distributing profits to family members on lower tax brackets.

Running a high-growth, innovation-focused business through a trust alone can still create roadblocks with competitive government grants. Most large grants, including major manufacturing and commercialisation programs, don’t cover 100% of project costs. They require matching funding or co-investment. Win a $500,000 grant, and the recipient must prove $500,000 of their own capital to match it.

Raising that matching capital from outside investors is where a trust structure becomes a hard barrier:

• A family trust cannot issue shares
• A family trust cannot offer equity or share options to key employees
• Outside investors cannot buy into a family trust, which is legally designed to benefit a single family unit

Restructuring from a unit trust or family trust into a company just to secure an investor’s cash for a grant is a high-cost, administrative process. Swapping units or trust interests for company shares can take months of accounting, legal negotiation and stamp duty review, which is long enough to miss a tight grant application window entirely.

Three triggers signal it’s time to incorporate

Three points typically mark when a business should move to a Proprietary Limited company.

Trigger A: revenue passes $200,000 and profit climbs

Once profit climbs past $200,000, personal income tax rates start to significantly exceed the corporate rate. On $300,000 in net profit, the gap between the top personal marginal rate and the 25% small business company tax rate runs to roughly $32,000 a year.

That $32,000 can be retained inside the company as capital for future growth, equipment, or matching funds for a grant application.

Trigger B: the first employee is hired, or commercial liability appears

A sole trader has no legal separation from their business. A contract dispute, supplier claim or workplace injury exposes personal savings, the family home, and other assets.

The moment a business hires its first employee or signs commercial agreements carrying delivery risk, it needs to incorporate. A company is a separate legal entity, and it shields personal assets from business liabilities.

Trigger C: intellectual property development begins

A business allocating funds to design, test or build something new should incorporate before that spending starts. Registering the company first means every dollar spent on testing, engineering and software development sits inside an eligible corporate entity, ready for the 48% R&D refund.

Also read: The 10 Best Australian Cities to Start a Business in 2026

A tax-free path to switch structures

Business owners who know they’re in the wrong structure often delay the switch, worried it will trigger a capital gains tax bill when assets, contracts, goodwill and IP move into a new company.

The Small Business Restructure Rollover (SBRR), under subdivision 328-G of the Income Tax Assessment Act, lets eligible small businesses transfer active business assets from one entity type to another, such as a sole trader structure into a company, without triggering an immediate capital gains tax liability.

In practice, that supports a simple sequence:

• Start as a sole trader to keep early admin costs low
• Focus on generating early revenue and refining the product
• Execute a tax-free rollover into a Pty Ltd company once revenue, liability or R&D triggers are hit

Done this way, the rollover protects assets, cuts the tax rate, and makes the company fully eligible for government grants and R&D incentives, without paying transfer tax.

Incorporating isn’t a cure-all

A company only protects personal assets if it’s run properly. Trading while insolvent, or failing to pay employee superannuation or PAYG withholding tax, lets the ATO bypass the corporate shield and issue a Director Penalty Notice, holding the director personally liable for the unpaid debts.

Consultants, IT contractors and other professional service providers also need to navigate the Personal Services Income (PSI) and Personal Services Business (PSB) rules carefully. Splitting income through a trust or company when it’s derived mainly from personal skills can trigger an ATO review, and reclassification under PSI rules can bring back taxes, interest and penalties.

There’s also what’s becoming known as the AI R&D trap. Many businesses assume that using AI tools in software development automatically qualifies for the R&D Tax Incentive. The Department of Industry, Science and Resources has warned that it doesn’t. The government actively audits AI-related claims to check they generate genuinely “new knowledge” through experimental activity, rather than routine software engineering.

An offer for the end-to-end grant and R&D support

At the end of the day, navigating the complex world of government funding does not have to be a solo journey. Over my 35 years of helping Australian businesses, I have seen far too many brilliant innovators lock themselves out of life-changing funding simply because of a structural mismatch on day one.

We have secured over $3 billion in government grants for our clients with a simple, ironclad promise: No Win, No Fee. If we do not secure your funding, you pay us absolutely nothing. Don’t leave your share of Australia’s massive business grant pool on the table. Let my team of accredited experts run a completely free assessment of your business against the 1,000+ grants currently available and give you a tailored roadmap.

Also my free guides, The Australian R&D Tax Incentive Handbook and Million Dollar Mistakes, are drawn from my three decades of front-line grant work. Reach out to us today on 1800 PATTENS, email grants@pattens.com, or book a free consultation. Let’s make sure your business structure is built to win.

Bruce Patten