Common questions we receive about the R&D Tax Incentive Program
What is the R&D Tax Incentive?
Companies engaging in eligible R&D activities can receive a tax credit from the R&D Tax Incentive (R&DTI). This program promotes R&D spending to support business expansion and innovation, which benefits the Australian economy.
A company’s R&D expenses may be partially covered by a tax offset if its R&D meets the program’s eligibility requirements. The R&DTI offers more than simply a reduced tax burden for the company, for early stage and startup companies it can provide tax refunds that can be the cash infusion that the company needs to continue to grow.
Who is this Program for?
This program is for companies undertaking Research & Development activities in different industries. This includes companies who are undertaking software development to solve a technical problem or those who are developing or trying to develop new technology. If a business’ qualifying R&D expenditure is larger than $20,000 and it is incorporated under Australian or international law, it should consider claiming the R&DTI. If the eligible R&D expenditure is less than $20,000, it can still claim the tax offset by employing a registered RSP to carry out its R&D.
What can this Program offer?
R&D projects that were conducted beginning July 1, 2021 are entitled to the benefits of the new scheme.
Companies with an annual combined turnover of less than $20 million can obtain a refundable R&D offset rate equivalent to their corporation tax rate and an additional 18.5% premium. The tax offset being refundable is beneficial for startups or early-stage companies because even when making tax losses, they would still be able to get a tax refund through this program.
Businesses with combined annual revenue of $20 million or more are eligible for a non-refundable R&D tax offset rate equivalent to their corporate tax rate plus an additional premium. The size of a company’s R&D spending relative to their overall annual company expenditure determines how much premium they can receive. There are two premium tiers:
- R&D intensity up to 2% is tax-offset at the company’s tax rate plus an additional 8.5% premium
The tax offset for R&D intensity over 2% is equivalent to the company’s tax rate plus a 16.5% premium
What are the “eligible R&D activities”?
The program’s governing statute, Section 355.25 of the ITAA 1997, specifies the kinds of activities that are eligible and activities that are excluded. To be qualified for the program, the activities must adhere to the legal criteria.
Activities related to research and development must fall under one of two categories—core R&D and supporting R&D— to qualify for the R&D tax credit.
Core R&D activities are activities whose outcomes cannot be known in advance. This means that they cannot be predicted based on present information, knowledge, or experience. These outcomes can only be determined by using a systematic progression of work that consists of established scientific principles and progresses logically from an idea through experimentation, observation and evaluation, and drawing of conclusions. Core R&D activities are also performed ultimately with the intention of producing new knowledge.
Activities that directly support core R&D activities or are carried out primarily with the intention of assisting core R&D activities are referred to as supporting R&D activities. Let’s say an activity you conducted was specifically excluded as a core R&D activity, it could still be claimed as a supporting activity as long as you establish a relationship with an eligible core. Other activities, such as the production of goods and services, can also be claimed as supporting activities if they meet the main criteria— i.e., that the dominant purpose of carrying out the activities is to support the core activity.
Typically, the R&D tax benefit is only applicable to R&D operations carried out in Australia. However, if Innovation and Science Australia determines that the activities match the requirements outlined in section 28D of the Industry Research and Development Act 1986, then the R&D activities conducted abroad may also qualify. For more information, please visit the Department of Industry, Innovation and Science’s website (https://www.business.gov.au/grants-and-programs/research-and-development-tax-incentive)
What is “eligible expenditure”?
The notional deduction that can be claimed under the R&DTI includes:
- contractor cost
- overheads such as rent, utilities, and equipment costs
- spending on R&D activities
- the decline in value of assets used to conduct R&D activities (including R&D partnership assets)
- balancing adjustments for assets used in R&D activities (including R&D partnership assets)
- expenses related to goods and materials used during R&D undertakings
A company can claim these expenses if their expenditure is of a kind eligible for the R&DTI, and if they incur these costs during the income year (other than an amount they incur to an associate but do not pay until a later income year) on any of the registered R&D activities.
How does the Program work?
The R&DTI is a self-assessment program. Businesses must determine whether their R&D activities are eligible under the law before registering to apply. Businesses are responsible for making sure that their R&D activities adhere to legal requirements. When determining whether your activities are eligible, kindly consult the legislation or you may also contact us for advice. It is also a requirement to maintain records to back up your assertion. AusIndustry and the ATO have the right to examine your registration and supporting evidence to determine your eligibility and to ensure it complies with the legislation.
My company is not paying taxes or making a profit, should I still claim this tax incentive?
Yes, you should. So long as you are an eligible R&D entity with under $20m turnover and your activities are valid R&D core activities that incurred eligible R&D expenditure, you will be entitled to a refundable tax offset. The great thing is that a refundable tax offset is most beneficial when you are in a tax loss or non tax paying situation as you receive a tax refund from the ATO. The money from the tax refund can be used for any further business expenditure that the company may have. For more information, you can take our R&D Tax Incentive Eligibility quiz which can help you assess your eligibility for this program.
Is the R&D Tax Incentive competitive?
No, the R&D Tax Incentive is a non-competitive tax incentive scheme. You are guaranteed a tax offset if you meet all the eligibility requirements.
Can I claim without a company?
No, you must have a corporation that is any of the following to be able to claim the R&D Tax Incentive:
- incorporated in accordance with Australian legislation
- incorporated in a foreign country but a resident of Australia for income tax purposes
- incorporated under foreign law, and you both are:
- a resident of a nation with which Australia has a double tax agreement and which has a “permanent establishment” definition
- using a permanent establishment, as outlined in the double tax agreement, to conduct business in Australia
You may also need to take into account the unique regulations that apply to consolidated groups and R&D partnerships if you are an R&D business. For more information, kindly visit this page on the Department of Industry, Innovation, and Science Website (https://business.gov.au/grants-and-programs/research-and-development-tax-incentive/check-if-you-are-eligible-for-the-randd-tax-incentive)
How do I register?
If your business qualifies as an R&D entity, you must register your R&D activities with the Department of Industry, Innovation and Science. You can claim the activities for the income year you wish to claim the offset within 10 months after the end of your company’s income year. Only after then can you claim the R&D tax offset in your company income tax return.
Registration of R&D is a two-step process with a registration form that registers the company’s core & supporting activities as well as a tax schedule that becomes a part of the company tax return. For more information about registering, please reach out to us
We at Innercode can assist you with the registration by making the process as easy as possible with the assistance of expert knowledge to guide you.
If any of your questions are not on this list, do not hesitate to send us a message at firstname.lastname@example.org or give us a call at (02) 8004 8951.