Government grants are one of the few sources of funding that don’t dilute your cap table. For Australian startups, the landscape is rich — the R&D Tax Incentive, the Industry Growth Program, Export Market Development Grants, state-based innovation funds, and a rotating cast of sector-specific programs. Free money, essentially.
Except it’s never quite free. Every grant comes with a legal framework: an agreement you sign, obligations you accept, reporting you commit to, and consequences if you get it wrong. Founders who treat grant applications as a paperwork exercise and don’t read the fine print can find themselves facing clawback demands, IP complications, or tax surprises that dwarf the value of the funding.
Here’s what you need to think about before you apply.
Grant Agreements Are Binding Contracts
This sounds obvious, but it’s routinely underestimated. When you accept a government grant, you enter into a grant agreement — a legally binding contract between your company and the granting body (whether that’s a Commonwealth department, a state agency, or an intermediary like AusIndustry or Austrade).
Commonwealth grants are governed by the Commonwealth Grants Rules and Principles 2024 (CGRPs), which replaced the previous 2017 guidelines. The CGRPs set the framework, but your specific obligations come from the grant agreement itself. These agreements typically include:
- Milestone and reporting obligations. You’ll need to deliver progress reports, financial acquittals, and evidence that you’ve met project milestones. Miss a deadline or fail to report, and the granting body can suspend payments or terminate the agreement.
- Permitted use of funds. Grant money must be spent on the approved activities described in your application. Diverting funds to other purposes — even other legitimate business expenses — is a breach.
- Record-keeping requirements. Most grant agreements require you to maintain detailed records for a specified period (often five to seven years) after the grant period ends, and to make those records available for audit.
Treat the grant agreement like any other significant commercial contract. Read it. Understand what you’re committing to. Get legal advice if the obligations are unclear.
Intellectual Property: Read the IP Clauses Carefully
This is where founders most often get caught off guard. Government grant agreements almost always contain IP provisions, and those provisions vary significantly between programs.
The General Position
Under the standard Commonwealth grant agreement templates, the grantee (your startup) typically retains ownership of any IP created during the funded project. The Commonwealth doesn’t usually claim ownership of your technology. That’s the good news.
The less-good news is that many agreements require you to grant the Commonwealth a perpetual, royalty-free licence to use, reproduce, and adapt any IP created with the grant funding — including project reports, data, and sometimes the technology itself. In practice, this licence is rarely exercised for commercial purposes, but it exists, and it’s worth understanding what you’ve agreed to.
Collaborative Programs
The picture gets more complicated with collaborative grant programs like the Cooperative Research Centres (CRC) program or university partnership grants. In these arrangements, IP ownership is typically governed by a separate participants’ agreement between the collaborating parties. If your startup is partnering with a university or research institution, the default position under most university IP policies is that the university owns IP created by its researchers — even if your startup funded the work through a grant.
Negotiate IP ownership and licensing terms before you sign. Once the project is underway and the IP has been created, your leverage disappears.
Impact on Investors
Investors conducting due diligence will want to understand your IP position. If your core technology was developed with grant funding, they’ll want to see the grant agreement and confirm that your startup owns the IP outright, or at minimum holds an exclusive commercial licence. A broad government licence over your core IP, or an unresolved co-ownership arrangement with a research partner, can complicate a funding round or exit.
Tax Treatment: Grants Are (Usually) Taxable Income
A common misconception is that government grants are tax-free. In most cases, they are not.
Under general Australian tax principles, a government grant received by a business in the ordinary course of carrying on that business is assessable income under section 6-5 of the Income Tax Assessment Act 1997 (Cth). You include it in your tax return and pay tax on it at your company tax rate.
There are exceptions. Certain COVID-era business support payments were classified as non-assessable, non-exempt (NANE) income under specific legislative provisions. Some state government grants have also been given NANE treatment. But these are exceptions, not the rule. Unless a grant is specifically declared NANE by legislation, assume it’s taxable.
The R&D Tax Incentive Interaction
If you’re claiming the R&D Tax Incentive and also receive a government grant for the same R&D expenditure, you need to understand the clawback provisions under Division 355 of the Income Tax Assessment Act 1997. Where you receive a government recoupment (including a grant) for expenditure that you’ve also claimed under the R&D Tax Incentive, the ATO applies a clawback adjustment that reduces your R&D offset.
In simple terms: you can’t double-dip. If the government funds your R&D through a grant, you generally can’t also claim the R&D Tax Incentive offset on that same expenditure. Failing to account for this can lead to amended assessments, penalties, and interest.
GST Considerations
The GST treatment of grants depends on whether you’re providing a “supply” in return for the grant funding. Under ATO Ruling GSTR 2012/2, a genuine grant — where the payment is made to assist the recipient to do something, rather than as consideration for a supply to the grantor — is not subject to GST. Most government innovation and commercialisation grants fall into this category. But if the grant agreement requires you to provide specific deliverables to the granting body (reports, data, technology access), there’s an argument that a supply exists, which could trigger GST obligations.
Compliance Obligations Don’t End When the Money Arrives
Receiving the grant is the beginning, not the end, of your compliance obligations.
Reporting and Acquittal
Most grants require periodic progress reports and a final acquittal — a detailed account of how the funds were spent, supported by financial records. The level of detail varies by program, but for Commonwealth grants it’s typically rigorous. You’ll need to demonstrate that expenditure aligns with the approved project budget and that milestones have been achieved.
Clawback Provisions
Grant agreements invariably contain clawback clauses. If you fail to complete the funded project, misuse funds, provide misleading information in your application, or breach your reporting obligations, the granting body can — and does — recover all or part of the grant. This isn’t a theoretical risk. The Australian National Audit Office regularly audits grant programs, and compliance action is taken against recipients who don’t meet their obligations.
Change of Control and Assignment
Many grant agreements include provisions that are triggered by a change of control of your company. If your startup is acquired, merges with another entity, or undergoes a significant change in ownership during the grant period, you may need to notify the granting body and obtain consent. Some agreements allow the grantor to terminate the agreement and recover funds if there’s an unapproved change of control.
This matters for startups on a fundraising trajectory. If a priced round significantly changes your ownership structure, check whether your grant agreements require notification or consent.
Eligibility Traps
Before you invest time in an application, make sure you actually qualify. Common eligibility issues for startups include:
- Entity type. Some grants require you to be incorporated as an Australian company (not a trust, partnership, or foreign entity). The R&D Tax Incentive requires registration as an R&D entity with AusIndustry.
- Revenue thresholds. The R&D Tax Incentive’s refundable offset (43.5%) is available to companies with aggregated turnover under $20 million. Above that threshold, you receive a non-refundable offset at a lower rate. The EMDG program has its own turnover caps.
- Timing. Many grants require you to apply before commencing the funded activity. If you’ve already built the product or spent the money, you may be ineligible. The R&D Tax Incentive requires registration with AusIndustry within 10 months of the end of the income year in which the R&D activities occurred.
- Co-contribution requirements. Most grants are co-funded, meaning you need to match a portion of the grant with your own cash or in-kind contributions. For the Industry Growth Program, the minimum co-contribution is typically dollar-for-dollar. Make sure you can fund your share before committing.
Practical Steps Before You Apply
1. Read the Grant Guidelines and Sample Agreement
Every Commonwealth grant program publishes guidelines and, in most cases, a sample or template grant agreement. Read both before you apply. The guidelines tell you what you need to qualify; the agreement tells you what you’re signing up for.
2. Assess the IP Implications
If the funded project involves creating or developing IP that’s core to your business, review the IP clauses in the grant agreement carefully. Understand what licences you’re granting, whether the government has any rights to the IP, and how the arrangement interacts with your existing IP strategy and any investor obligations.
3. Plan for the Tax Impact
Factor the grant into your tax planning. If the grant is assessable income, you’ll owe tax on it. If you’re also claiming the R&D Tax Incentive, understand the clawback interaction and plan accordingly.
4. Build Compliance Infrastructure Early
Don’t wait until the first reporting deadline to figure out how you’ll track expenditure and demonstrate milestone achievement. Set up proper record-keeping from day one — dedicated cost centres, time tracking for funded activities, and document retention processes.
5. Get Legal and Accounting Advice
Grant agreements are legal contracts with financial consequences. A lawyer can help you understand the IP, compliance, and change-of-control provisions. An accountant or R&D tax specialist can help you navigate the tax treatment and avoid the double-dip trap. The cost of advice upfront is a fraction of the cost of getting it wrong.
The Bottom Line
Government grants are a valuable funding tool for Australian startups — non-dilutive, often generous, and increasingly targeted at the innovation sector. But they’re not free money. They come with legal obligations, IP implications, tax consequences, and compliance requirements that persist long after the funding hits your bank account.
The founders who get the most out of grants are the ones who go in with their eyes open: they read the agreement, understand the obligations, and build the systems to comply. The ones who treat it as a box-ticking exercise tend to learn the hard way that the government takes its grant conditions seriously.
If you’re considering applying for a grant and want to understand the legal implications, get in touch. We help Australian startups navigate government funding programs so they can access the capital without the surprises.
