About the R&D Tax Incentive

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.

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.

Refundable R&D Tax Offset  (FY21)

Eligible R&D entities with group turnover of less than $20 million receive a 43.5 percent refundable tax offset, which equates to a 17.5 percent after tax benefit (tax savings) for FY21.  If the company has sufficient tax losses/offsets, this could result in a cash refund though of up to 43.5 percent of the eligible R&D expenditure.

Non-Refundable R&D Tax Offset  (FY21)

Eligible R&D entities with group turnover of greater than $20 million receive a 38.5 percent non-refundable tax offset.

A company with group turnover between $20 million and $50 million is also likely to be a base rate entity subject to a 26% company tax rate in FY21, so the 38.5% non-refundable tax offset equates to a permanent tax benefit (tax savings) of 12.5% of their eligible R&D expenditure.

A company with group turnover greater than $50 million cannot be a base rate entity and will therefore be subject to a 30% company tax rate and a 38.5% non-refundable tax offset rate. In this scenario, the company will receive a permanent tax benefit of 8.5% of their eligible R&D expenditure.

Changes to the R&D Tax Incentive (FY22 and beyond)

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 though 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 company’s income year before the tax offset can be claimed in the company’s income tax return. 

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