The Research and Development Tax Incentive (R&DTI) is a program offered in Australian tax laws that provides a tax offset to companies engaged in eligible R&D activities. Its primary goal is to encourage investments in research and development, fostering growth and innovation within companies and contributing to the overall development of the Australian economy.
In this article
- Key Purpose behind the R&D Tax Incentive
- Anti-Avoidance Rules
- Tax Offset Rates for the R&D Tax Incentive
- Eligibility for R&D Tax Offsets
- Eligible Notional Deductions for R&D Tax Incentive
- Steps for Claiming the R&D Tax Offset
- Keeping R&D Records
- Apply for Registration of Activities
- Making Adjustments
- Lodging Your Claim for the Income Year
- Correcting Mistakes and Challenging Decisions
- Using a Tax Agent or R&D Consultant
- Red Flags of Risky Behavior
Key Purpose behind the R&D Tax Incentive
The R&D tax incentive serves several key purposes:
1. Encouraging R&D
The program incentivizes industries to undertake research and development projects that they might not have pursued otherwise. By offering tax benefits, the government aims to promote a culture of innovation and knowledge creation.
2. Supporting Smaller Firms
To boost R&D participation among smaller businesses, the incentive enhances the benefits for these companies. This encouragement aims to level the playing field and make it more feasible for smaller enterprises to invest in research and development.
3. Simplifying Support
The R&DTI aims to provide businesses with a more predictable and less complex support structure. By offering tax offsets and specific incentives, the program aims to streamline the process and facilitate easier access to support for eligible R&D activities.
Anti-avoidance rules have been introduced as part of the Research and Development Tax Incentive (R&DTI) program in Australia. These rules are incorporated into the general anti-avoidance provision of Part IVA of the Income Tax Assessment Act 1936, effective from 1st July 2021.
Under these rules, R&D tax offsets are now considered tax benefits for Part IVA. A tax benefit is considered to arise from an R&D claim if the following conditions are met:
- The R&D entity engages in a scheme to access the R&D tax offset.
- A tax benefit is received as a result of the scheme.
- The primary purpose of the R&D entity entering into the scheme is either to:
- Obtain the R&D tax offset, or
- Obtain a refundable R&D tax offset when they would have or could have obtained a non-refundable R&D tax offset.
If the arrangement falls within the scope of Part IVA, any tax benefits obtained from the scheme can be invalidated or canceled.
Additionally, the tax authorities are required to publish the R&D expenditure claimed by an R&D entity. This publication will occur two years after the end of the financial year, with the first publication expected to take place after 1st July 2024 for the income year ending 30th June 2022.
The purpose of publishing this information is to enhance transparency and public accountability for R&D claimants, as well as to encourage voluntary compliance with the R&D program.
The published information will include details such as the name of the R&D entity, Australian business number (ABN) or Australian company number (ACN), and the amount of notional deductions claimed (excluding any feedstock adjustments).
Tax Offset Rates for the R&D Tax Incentive
The Research and Development (R&D) tax incentive aims to encourage more companies to engage in research and development activities by providing targeted tax offsets. For income years commencing on or after 1st July 2021, eligible entities engaging in R&D activities can benefit from the R&D Tax Incentive through two types of tax offsets.
1. Refundable Tax Offset: Entities with an aggregated turnover below $20 million per annum, not controlled by income tax-exempt entities, can receive a refundable tax offset. This offset is calculated by adding the entity’s company tax rate with an additional 18.5% premium.
2. Non-Refundable Tax Offset: All other eligible entities are entitled to a non-refundable tax offset. The calculation for this offset involves adding the entity’s company tax rate with a two-tiered premium based on the proportion of notional R&D expenditure to the total expenditure for the income year.
The premium rates are as follows:
- 8.5% for R&D expenditure up to 2% of total expenditure.
- 16.5% for R&D expenditure exceeding 2% of total expenditure.
These tax offsets provide incentives for entities conducting R&D activities, with the specific rates determined by the entity’s eligibility and the proportion of R&D expenditure to total expenditure.
Entities can carry forward unused offset amounts to future income years. Companies transitioning from the R&D concession to the R&D tax incentive are also eligible.
The tax authorities and AusIndustry, on behalf of the Department of Industry, Science, and Resources, jointly administer the R&D tax incentive. Entities must register their R&D activities with AusIndustry before claiming the tax offset.
The tax authorities are responsible for processing and applying the R&D offset, ensuring that companies are entitled to tax offsets for their claimed R&D expenditure when filing their tax returns.
Eligibility for R&D Tax Offsets
To establish if your organization qualifies for registering R&D activities and claiming R&D tax offsets during a specific year, you must take into account the following factors:
Eligible R&D Entities
To claim R&D tax offsets, your entity must be categorized as an R&D entity. An R&D entity can be a corporation that is either:
- Incorporated under Australian law.
- Incorporated under foreign law but classified as an Australian resident for income tax purposes.
- Incorporated under foreign law and satisfies the definition of ‘permanent establishment’ in a country with which Australia has a double tax agreement.
Entities not eligible for R&D tax offsets include:
- Corporate limited partnerships
- Exempt entities where the entire income is tax-exempt
- Trusts (except for public trading trusts with a corporate trustee)
Your entity must have incurred notional deductions of at least $20,000 on eligible R&D activities to qualify for R&D tax offsets.
SPECIAL RULES FOR CONSOLIDATED GROUPS AND R&D PARTNERSHIPS
1. Consolidated Groups: If your entity is part of a consolidated group or multiple entry consolidated (MEC) group, the R&D tax incentive applies to the group as a single entity.
The head company in the group is responsible for both registering and claiming the tax incentive for all the research and development (R&D) activities carried out within the group.
2. R&D Partnerships: If your entity is a partner in an R&D partnership, the partnership itself is not eligible to claim the R&D tax incentive. However, the partners in the partnership may be able to claim for R&D activities undertaken by the partnership.
INFORMATION ABOUT R&D ACTIVITIES
A. For Whom R&D Activities Are Conducted
Typically, you can only seek R&D tax offsets for research and development (R&D) activities that are conducted specifically for your own entity, rather than on behalf of another entity. The major benefit recipient of the R&D activities (e.g., the entity that owns the results) is considered when determining eligibility for claiming R&D expenditure.
- Under certain conditions, you may qualify for R&D tax offsets if your R&D activities are conducted for an associated foreign corporation from a country with which Australia has a comprehensive double tax agreement.
- Foreign corporations conducting business through a permanent establishment in Australia may claim R&D tax offsets if the R&D activities are conducted for the corporation and not for the permanent establishment.
To claim R&D tax offsets, ensure your entity meets the eligibility requirements and register your R&D activities with AusIndustry before making a claim.
B. Eligible R&D Activities
Determining your eligibility to claim the R&D tax offset also relies on where your research and development (R&D) activities are conducted and the nature of those activities.
C. Location of R&D Activities
Generally, R&D activities conducted within Australia are eligible for the R&D tax incentive. However, R&D activities carried out overseas can also qualify if AusIndustry verifies that they meet the conditions outlined in section 28D of the Industry Research and Development Act 1986 (IR&D Act).
D. Classification of R&D Activities
To be eligible for the R&D tax incentive, your R&D activities must meet specific criteria and fall into either Core R&D activities or Supporting R&D activities categories.
1. Core R&D Activities
Core R&D activities are experimental activities characterized by the following:
- The outcome cannot be known or determined in advance based on existing knowledge, information, or experience.
- They require a systematic and logical progression of work based on established scientific principles.
- The purpose is to generate new knowledge, including the development of new materials, products, devices, processes, or services. Certain activities are excluded from being classified as core R&D activities, and you can refer to the List of excluded activities for more details.
2. Supporting R&D Activities
Supporting R&D activities are directly associated with core R&D activities or are undertaken primarily to support core R&D activities. Supporting activities can involve the production or direct relation to the production of goods or services, and they may also be excluded from being categorized as core R&D activities based on certain requirements.
It is important to consider the classification and nature of your R&D activities to determine their eligibility for the R&D tax incentive. For more detailed information, please refer to the relevant resources on Eligible R&D activities.
Eligible Notional Deductions for R&D Tax Incentive
To qualify for the Research and Development (R&D) tax offset, your total notional deductions for an income year must amount to at least $20,000. If your total notional deductions fall below this threshold, you can still claim the R&D tax offset for specific expenditures, including:
- Expenditure paid to a Research Service Provider (RSP) for services within a registered research field under the IR&D Act, provided the RSP is not associated with your R&D entity.
- Monetary contributions made under the Co-operative Research Centre (CRC) program.
As an R&D entity, you can claim notional deductions for various types of eligible expenditure, including:
- Expenditure on R&D activities, including overseas activities covered by an Advance Finding from AusIndustry, payments to associates, and expenditure to an RSP.
- Decline in the value of assets used for conducting R&D activities (including R&D partnership assets).
- Balancing adjustments apply to assets used exclusively for research and development (R&D) activities, including assets used in R&D partnerships.
- Expenditure associated with converting or handling materials and goods during research and development (R&D) endeavors to produce products suitable for the market (feedstock expenditure).
- Monetary contributions under the CRC program.
Notional R&D deductions are claimable if the expenditure meets the eligibility criteria under the R&D tax incentive and is incurred during the income year on one or more registered R&D activities.
Generally, R&D expenditure is claimable in the income year it is incurred, with exceptions when an amount is incurred but not paid to an associate or when prepayment rules apply for services provided over a period.
Certain types of expenditure are not eligible for notional deductions under the R&D tax incentive, including:
- Interest expenditure (as defined in the interest withholding tax rules).
- Expenditure not considered at risk.
- Core technology expenditure.
- Expenditure included in the cost of a depreciating asset (though decline in value notional deductions may apply).
- Expenditure for acquiring, constructing, extending, altering, or improving a building (or part of a building).
Ineligible expenditure does not qualify for the enhanced tax benefits available under the R&D tax offsets. However, you can still consider these expenses under the regular deduction provisions of the income tax law, as they may be deductible from your assessable income.
Steps for Claiming the R&D Tax Offset
Claiming the R&D Tax Offset
If your company is engaged in R&D activities, you may qualify for the R&D tax offset provided under the R&D tax incentive. Assess your eligibility and determine whether your activities meet the criteria for the R&D tax incentive by following the six steps and checklist provided. It is essential to maintain accurate records as required by law.
If you intend to use a tax agent or R&D consultant for assistance, ensure they are registered.
Registering Your R&D Activities
If your company is an R&D entity and you want to claim the R&D tax offset in your company’s tax return, you must register your R&D activities with AusIndustry, acting on behalf of Industry Innovation and Science Australia.
Register your R&D activities for each income year you intend to claim the offset, within 10 months of the end of your company’s income year, and before claiming the R&D tax offset in your company tax return.
Research Service Providers (RSPs) must also register with AusIndustry on annual basis
STEPS TO BE FOLLOWED
To determine your eligibility for claiming the Research and Development (R&D) tax offset, calculating the amount you can claim, and keeping the required records, follow the steps outlined below:
Step 1. Checking Initial Eligibility Requirements
Ensure that you meet the four initial eligibility requirements by answering the following questions:
- Are you an eligible R&D entity?
- Have you carried out eligible activities?
- Have you registered your activities with AusIndustry?
- Do your notional deductions qualify (exceed $20,000)?
Step 2. Determining Control by Exempt Entities
After confirming that you meet the initial eligibility requirements, it is important to assess whether your company is controlled by any exempt entities. This determination will impact the type of tax offset you can claim.
Exempt entities are entities whose ordinary and statutory income is exempt from income tax, or Commonwealth entities that are not subject to tax.
If your company is under the control of one or multiple exempt entities, you are not eligible to claim the refundable tax offset. However, you can claim the non-refundable tax offset instead. In this case, you do not need to consider your aggregated turnover to determine the tax offset, and you can proceed to Step 4 – Work out which tax offset you can claim.
If your company is not controlled by exempt entities, you may be eligible to claim the refundable tax offset if your aggregated turnover is less than $20 million.
To ascertain whether your company is controlled by exempt entities, you need to assess whether one or more exempt entities, their affiliates, or both meet either of the following conditions:
- They hold shares and other equity interests in your company, providing them or their affiliates with at least 50% of the voting power in your company.
- They have the right to receive at least 50% of any income or capital distributed by your company.
Step 3. Calculating Your Aggregated Turnover
If your company is not under the control of any exempt entities, you need to calculate your aggregated turnover to determine the appropriate tax offset.
Aggregated turnover is determined by following the same rules as those for the small business entity concessions. It is the total of the following:
- Your company’s annual turnover for the specific income year.
- The annual turnover of any entity connected with your company, for the period that the entity is connected with your company.
- The annual turnover of any entity affiliated with your company, for the period that the entity is affiliated with your company.
Both Australian and foreign entities can be considered connected or affiliated with your company. This means that your aggregated turnover includes the annual turnover of both Australian and foreign entities for the duration they are connected or affiliated with your company.
When calculating aggregated turnover for an income year, do not include the annual turnover of entities that are not connected or affiliated with your company, or amounts resulting from transactions between your connected entities or affiliates.
Annual turnover refers to the total ordinary income derived by your company during the income year while carrying on its business activities. This includes income earned on a global scale. If your company is not engaged in business activities throughout the income year, its annual turnover is zero.
If your company is a partner in an R&D partnership during the income year, your aggregated turnover includes your proportionate share of the R&D partnership’s annual turnover.
Once you have determined your annual turnover, you need to calculate the annual turnover for each entity connected or affiliated with your company.
Step 4. Determining the Applicable Tax Offset
Based on the previous steps, you can determine the tax offset that you can claim.
If your company is controlled by exempt entities, as determined in Step 2, or if your aggregated turnover calculated in Step 3 is $20 million or more, you can claim the non-refundable tax offset.
If your aggregated turnover calculated in Step 3 is less than $20 million and your company is not controlled by exempt entities, you can claim the refundable tax offset.
Step 5. Calculating Your Tax Offset
To calculate the amount of your tax offset, you need to determine the notional deductions and, if claiming the non-refundable tax offset, the total expenses for the income year.
Notional deductions represent the amounts that you can claim for calculating your tax offset. This includes R&D expenses, the decline in value of R&D assets, and contributions made under the Cooperative Research Centres Program.
Total expenses are determined in accordance with accounting standards and generally accepted accounting principles. The amount reported at Item 6 on your company’s tax return typically represents the total expenses.
The total expenses include the notional deduction amount. If a notional deduction amount is not already included in the company’s total expenses, an adjustment is made to include it.
Rules are in place to avoid double counting of amounts recognized at different times as notional deductions and total expenses.
To calculate the refundable R&D tax offset, multiply the notional deduction by your corporate tax rate plus a premium of 18.5%.
Step 6. Submitting Your Claim
After confirming your eligibility to claim the R&D tax incentive tax offset, the final step is to lodge your claim for the income year. To do this, complete a research and development tax incentive schedule and the relevant sections of the company tax return.
Submit both the return and schedule to us. The provided instructions will guide you through the form completion process.
To assist you in filling out the research and development tax incentive schedule, you can use the research and development tax incentive calculator. Once your calculations are complete, you can print a PDF version of the schedule to include with your company tax return.
Before submitting the R&D tax incentive schedule, ensure that you include your unique AusIndustry registration number for the year.
Keeping R&D Records
Maintaining proper records is essential to substantiate your claim. These records must generally be retained for at least 5 years. Failure to keep adequate records may result in penalties.
Your business records should provide evidence of the:
- Amount of expenditure on R&D activities.
- Nature of the R&D activities.
- Relationship between the expenditure and the activities.
You should have documentation showing how you allocated expenditure between your eligible core R&D activities, supporting R&D activities, and other non-R&D activities. It is your responsibility to demonstrate to tax authorities that you used reasonable methods to distinguish between your R&D and non-R&D expenses.
Specific R&D Records
Retain documents such as reports detailing the R&D activities carried out, the parties involved in conducting the R&D, and the time spent by your staff on these activities.
By properly lodging your claim and maintaining accurate records, you can ensure a successful and compliant R&D tax incentive tax offset claim for your company.
Apply for Registration of Activities
To claim the R&D tax incentive, you must register your eligible R&D activities with AusIndustry and obtain a unique registration number. The registration process involves the following:
- Register for each income year you intend to claim the offset.
- Submit your application through the R&D Tax Incentive customer portal within 10 months after the end of your company’s income year.
- Complete the registration before claiming the R&D tax offset in your company tax return.
Keep in mind that when you register your activities with AusIndustry, it does not confirm the eligibility or authorize the payment of a tax offset. AusIndustry and the tax authorities collaborate closely to ensure the integrity of the R&D tax incentive.
It is important to provide accurate and consistent information regarding your activities and expenses in both your registration and R&D schedules submitted to the tax authorities.
There may be circumstances where you need to make adjustments to your tax return. These situations include:
- Receiving a government recoupment.
- Producing marketable products or using products for your own purposes resulting from your R&D activities.
- Being registered for GST.
Lodging Your Claim for the Income Year
Once your activities are registered with AusIndustry, you can claim the R&D tax incentive tax offset by completing an R&D tax incentive schedule and relevant sections of the company tax return. Utilize the R&D tax incentive calculator to calculate your entitlement, and ensure accuracy when including expenditure in your claim.
It is crucial to make correct claims to avoid penalties. Only include expenditure incurred on R&D activities, not ordinary business activities. Maintain accurate and consistent information supported by evidence and records provided to both AusIndustry and the tax authorities. Significant discrepancies may lead to a review of your claim.
Correcting Mistakes and Challenging Decisions
If you need to amend your registration or claim for the R&D tax incentive, there are procedures to follow:
- Amend your tax return if you have engaged in aggressive R&D arrangements or if you need to rectify a claim made for normal business activities.
- Seek independent professional advice, make a voluntary disclosure, or amend your tax return.
- Challenge decisions made by the tax authorities or AusIndustry by submitting an objection within the specified time limits.
Instructions on how to request a review will be provided when a decision is made by the tax authorities or AusIndustry.
Using a Tax Agent or R&D Consultant
If you decide to seek assistance from a tax agent or R&D consultant for your tax return or R&D tax incentive schedule, ensure that they are registered tax agents. You can verify their registration by asking to see their Certificate of Registration or by searching the tax agent register on the Tax Practitioners Board website.
While the services of an R&D consultant can be helpful in preparing registration applications and offset claims, it does not guarantee eligibility.
Participants and promoters of aggressive R&D arrangements may face penalties, and registered tax agents involved in promoting such arrangements may be reported to the Tax Practitioners Board for potential breaches of the Tax Agent Services Act 2009.
Red Flags of Risky Behavior
It is essential for claimants and regulators of the R&D tax incentive to collaborate in ensuring that the incentive benefits those who meet the requirements. Consider the following:
- Seek independent advice to verify your R&D claim and check its alignment with AusIndustry’s eligibility guidelines.
- Be cautious if approached by a new tax agent or R&D consultant who promises unrealistic claims, such as tripling your claim or including ordinary business expenses as R&D expenses.
- Exercise scrutiny when a claimant contends that the entire cost of developing new products qualifies as R&D.
By following the correct procedures, making accurate claims, and adhering to regulatory guidelines, you can maximize the benefits of the R&D tax incentive while ensuring compliance.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.