The research and development (R&D) tax incentive applies to eligible expenditure incurred by eligible entities that register their activities with AusIndustry.
Eligible entities may be entitled to either:
- a 43.5% refundable tax offset – if they have an aggregated turnover of less than $20 million which are not controlled by income tax exempt entities; or
- a 38.5% non-refundable tax offset – for all other entities. Unused credits can be carried forward for use in future years.
The rate of the R&D tax offset is reduced by the company tax rate for the portion of an entity’s notional R&D deductions that exceeds $100 million in the income year.
An eligible entity is:
- a company incorporated under Australian law
- a company incorporated under foreign law, but is an Australian resident for tax purposes
- a foreign company that:
- is a resident of a country with which Australia has a double tax agreement and
- carries on the R&D activities through a permanent establishment in Australia; and
- a public trading trust with a corporate trustee.
If your business operates through a trust structure (discretionary or unit trust that is not publicly traded) or a corporate limited partnership then you will not be eligible for the research and development tax incentive. Sole traders and tax-exempt entities are also ineligible.
The R&D tax offset is available to an Australian resident R&D entity if the activities are conducted by the R&D entity itself, or a foreign company that is a tax resident of a of a country with which Australia has a double tax agreement, and the activities are conducted under a written agreement by the entities.
Registering for the R&D Tax Incentive
To claim the R&D tax offset, and eligible entity must register its activities with AusIndustry within ten months after the end of the income year in which the offset is to be claimed.
Eligible entities must reapply every year, and cannot claim the R&D offset in their tax return until their eligibility has been approved. Eligible entities that have incurred eligible activities can register for the R&D tax incentive with AusIndustry via the Business Portal.
Eligible R&D activities must be either core R&D activities, or supporting R&D activities.
Core R&D Activities
Core R&D activities are defined in the Income Tax Assessment Act 1997 [s355-24(1)] as experimental activities:
- whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:
- is based on principals of established science; and
- proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and
- that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).
Is it Experimental?
Eligibility for R&D claims have been refused on the basis that the R&D activities were not deemed to be experimental. In cases where the outcome of the activities could been reasonably predicted in advance based on existing knowledge or information, AusIndustry has demonstrated a willingness to deny R&D tax incentive registration to applicants.
Entities must maintaining contemporaneous documentation to support their experimental activity. In many cases, project documentation focuses on the commercial aspects of an R&D activity rather than focusing on the scientific method of the R&D activity. There have been cases where lack of contemporaneous documentation of the experimental activities was a major contributing factor to an R&D tax claim being refused.
Specifically Excluded R&D Core Activities
The following activities are specifically excluded from being classed as core R&D activities:
- market research, market testing or market development, or sales promotion;
- prospecting, exploring or drilling for minerals or petroleum for the purposes of discovering, locating or quantifying deposits;
- management studies or efficiency surveys;
- research in social sciences, arts or humanities;
- commercial, legal and administrative aspects of patenting, licensing or other activities;
- activities associated with complying with statutory requirements or standards, including maintaining national standards, calibrating secondary standards or routine testing and analysis;
- any activity related to the reproduction of a commercial product or process by examining an existing system or ascertained from publicly available specifications;
- developing, modifying or customising computer software for the dominant purpose of use by the entity or an associate/affiliate for their internal administration.
Supporting R&D Activities
Supporting R&D activities are directly related to core R&D activities, or are undertaken for the dominant purpose of supporting core R&D activities. For example, a literature review related to the core activity would be claimable as a supporting R&D activity as would the maintenance of an aquarium used to house fish for the development of a new feed pellet.
Eligible R&D Expenditure
Eligible R&D entities will be entitled to an R&D tax offset if they incur $20,000 of eligible notional deductions in a given income year. Eligible expenditure may include:
- expenditure incurred on R&D activities;
- the decline in value of assets used for conducting R&D activities;
- balancing adjustments for assets used only for conducting R&D activities;
- expenditure on goods and materials transformed or processed during R&D activities to produce marketable products (feedstock expenditure);
- Monetary contributions under Co-operative Research Centre (CRC) program.
An eligible entity will be entitled to a notional deduction in relation to eligible expenditure to the extent that it is incurred, expet where payments to associates are not actually made.
Ineligible R&D Expenditure
Notional deductions cannot include:
- interest expenditure;
- expenditure that is not at risk;
- core technology expenditure;
- expenditure included in the cost of a depreciating asset (though it may form part of decline in value notional deductions;
- expenditure incurred to acquire or construct a building (or extension).
R&D Record Keeping
Eligible entities that claim the R&D tax offset must maintain records that demonstrate to the ATO and to Innovation Australia that it has conducted eligible R&D activities and incurred eligible expenditure.
Business records must show:
- the amount of expenditure incurred on R&D activities;
- the nature of the R&D activities;
- the relationship of the expenditure to the activities; and
- the method of apportionment of the expenditure between core R&D activities and supporting R&D activities as opposed to non-R&D activities.
Specific R&D records must be kept for a minimum of five years from lodgement and must detail:
- the R&D activities carried out;
- who conducted the R&D activities; and
- the time that the R&D entity’s staff spent on R&D activities.
For more information about the R&D tax incentive and how it may help your business, please get in touch with us using the form.