The Australian Federal Government’s R&D Tax Incentive program encourages companies to engage in R&D to boost competitiveness and improve productivity in the Australian economy, by providing a tax offset for eligible R&D activities. Companies with eligible R&D expenditure may be eligible for either a refundable or non-refundable tax offset.
About the R&D Tax Incentive
Eligible Entities
Generally, an eligible R&D entity is a corporation that is incorporated under an Australian law or incorporated under a foreign law but an Australian resident for income tax purposes.
Changes to the R&D Tax Incentive
For R&D claims for FY22 and beyond, the way of calculating the permanent tax benefit will change due to legislative changes and will be independent of the company’s tax rate.
A company with group turnover of less than $20 million will receive a permanent tax benefit of 18.5% of its eligible R&D expenditure, with total benefit ranging from 18.5% – 43.5% depending on available tax losses/offsets. For companies that do not have any tax losses/offsets the total benefit will be the same as the permanent tax benefit (i.e. 18.5% of R&D expenditure).
A company with turnover greater than $20 million and R&D expenditure below 2% of its total annual company expenses will receive a permanent tax benefit of 8.5%. Where R&D expenditure exceeds 2% of total company expenses, the company will receive a permanent tax benefit of 16.5%.
Eligibility Criteria for the R&D Tax Incentive
Companies must have incurred eligible R&D expenditure or notional deductions of at least $20,000 (unless using a Research Service Provider or a Cooperative Research Centre).
R&D activities must also meet certain criteria to be eligible for the R&D tax incentive. They must be classified as either core R&D activities or supporting R&D activities.
Core R&D Activities are experimental activities whose outcome cannot be known or determined in advance and can only be determined by applying a systematic progression of work based on principles of established science; and proceeds from hypothesis to experiment, observation and evaluation and leads to logical conclusions.
In addition, core R&D activities are conducted for the purpose of generating new knowledge (including new or improved materials, products, devices, processes or services).
Some R&D activities are excluded from being a core activity.
Supporting R&D Activities are activities that are directly related to core R&D activities or, for certain activities, have been undertaken for the dominant purpose of supporting core R&D activities.
Supporting activities are only eligible if the R&D entity can demonstrate that the directly related core activity has already commenced, or at the time the supporting activity commenced, it is clearly demonstrable that the R&D entity had every intention of commencing the directly related core activity in the very near future, even if ultimately it does not commence.
About the “For” test
Eligible R&D activities can be performed by another party “for” a company, provided the company seeking to claim the R&D tax incentive, on balance:
- Bears the financial burden of carrying out the R&D activities
- Has a sufficient degree of beneficial ownership in the results of the R&D activities
- Has a sufficient degree of control over the conduct of the R&D activities
Claiming the R&D Tax Offset
The Department of Industry, Science, Energy and Resources (program delivery by AusIndustry) and the ATO jointly administer the R&D Tax Incentive.
R&D activities must be registered with AusIndustry within 10 months after the end of a company’s income year before the tax offset can be claimed in the company’s income tax return.
