Research and Development (R&D) Tax Incentive

Research and Development (R&D) Tax Incentive

This incentive helps companies innovate and grow by offsetting some of the costs of eligible R&D expenditure against their income tax liabilities, with the surplus available to be refunded.

The R&D Tax Incentive is a refundable offset available to an eligible company for undertaking eligible R&D, and who meet a myriad of other requirements. The incentive is claimed on lodgment of the company’s income tax return each year.

While it is up to companies to self assess their eligibility to claim, there is an audit process undertaken by both Department of Industry, Innovation and Science and the Australian Taxation Office that a claimant may be subject to. The Australian Taxation Office is bound by the decision of the Department in relation to eligible R&D.

There are a number of steps in this process, and we always recommend engaging an R&D consultant at the time of commencing any R&D, as the record keeping is an essential element to maximizing the company’s claim – the better the system of data collection from the start, the greater the value of the offset. If you would like to be referred to a consultant in this area, please contact our office.

The main steps in the process of claiming the R&D Tax Incentive are:

1. Self-assess the eligibility of your company

2. Self-assess the eligibility of your R&D activities

3. Undertake the R&D during the year (and keep detailed expenditure records)

4. Register within the time limit, completing the annual application form

5. Receive your R&D number. Complete and lodge your company’s income tax return

1. Self-assess the eligibility of your company

Firstly, you need to be an eligible R&D Entity, which is a corporation that is any of the following:

• incorporated under an Australian law

• incorporated under a foreign law but you are an Australian resident for income tax purposes

• incorporated under a foreign law and you are both    

  • a resident of a country with which Australia has a double tax agreement, with a definition of 'permanent establishment'

  • carrying on business in Australia through a permanent establishment as defined in the double tax agreement.

For the head company of a Consolidated or Multiple Entry Consolidated Group, the R&D expenditure of your subsidiaries are considered to be expenditure of the head company and the R&D Tax Incentive claim is lodged by the head company.

Eligible, registered companies can partner to undertake R&D, but each partner must be registered and lodge their own claim.

Individual, trust, corporate limited partnerships and exempt entities are excluded from the definition of R&D entity.

2. Self-assess the Eligibility of your R&D Activities

For your R&D to qualify for the incentive, the company must plan to have at least one Core element and there may also be Supporting elements.

From the Department of Innovation and Industry:

Core R&D activities are activities that a competent professional can’t know or determine in advance, based on current knowledge, information and experience.

The outcomes of Core R&D activities can only be determined by applying a systematic progression of work that:

• is based on the principles of established science;
• proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusion;
• you must conduct this work for the purpose of generating new knowledge. Your new knowledge can be in the form of new or improved materials, products, devices, processes or services.

Some expenditure is excluded from Core R&D and Supporting R&D activities – see the Appendix 1 below for more information.

Supporting R&D activities are those that you can demonstrate relate directly to the Core R&D activities being undertaken. There must be a direct relationship between supporting R&D expenditure being incurred, and the core activities being undertaken, and you will need to detail this relationship in your application.

When preparing an R&D application, you may find that some activities relate to both supporting R&D and the business the company undertakes. Supporting R&D activities can only be claimed if they are undertaken for the dominant purpose of supporting your core R&D activities, and include activities that:

• are excluded from being core R&D activities
• produce goods or services
• are directly related to producing goods or services. 

Note, generally your Core and Supporting R&D activity expenditure must total at least $20,000 for you to lodge an application, but if you use a Registered Service Providers (RSP) for the R&D Tax Incentive, you may be able to access the incentive even where you have spent less than $20k.

3. Undertake the R&D during the year (and keep detailed records)

This is where we see clients benefit from engaging with professional R&D consultants at the commencement of their R&D journey.

It is the systems and processes that you implement which makes the collection of information regarding the core and supporting activity R&D undertaken, and all related costs, simple to collate at the end of the year. This results in less time required to prepare your application and an increased range and quantum of costs associated with the R&D activities being recorded at the time they are incurred.

For many clients, wages and related costs make up a large portion of their company’s R&D tax offset claim. The key to successfully including these expenses is linking the hours invested in the R&D activities with the outcomes of the activities, for every hour undertaken by every staff member, contractor or other worker.

In our experience, R&D consultants have an opportunity to view a wide range of client systems and can advise you of the most appropriate process for the R&D activities that you are undertaking.

4. Complete a Registration Application

1. Your company must register each year with the Department of Industry, Innovation and Science to make a claim for the R&D Tax Incentive;

2. Your company must register within 10 months of the end of your financial year - For 30 June balancers, the registration application must be lodged by 30 April in the year following 30 June;

3. We always recommend lodging the application soon after the close of the financial year, where there is a refund due to your company;

4. Upon successful registration and review of your application, you will receive a R&D number to be included in the company’s income tax return.

5. Receive your R&D number, and complete and lodge your income tax return

On receipt of your IR number, you can complete the company’s income tax return for the year – a separate R&D schedule is completed and the IR number enables electronic lodgment of the return with the Taxation Office. Your R&D consultant will supply all of the information required to complete this schedule.

From 1 July 2021, there has been a change in the percentage of the eligible R&D expenditure that generates the offset for some businesses, based on your turnover. From the ATO website:

Turnover of less than $20 million

For R&D entities with aggregated turnover of less than $20 million, the refundable R&D tax offset is your corporate tax rate plus an 18.5% premium (2022 company tax rate for base rate entities is 25%, so the R&D Tax Incentive is 43.5%).

Turnover of $20 million or more

For R&D entities with aggregated turnover of $20 million or more, the non-refundable R&D tax offset is your corporate tax rate plus an incremental premium.

The premium increments are based on your R&D Intensity. This is a percentage of your eligible R&D expenditure as proportion of your total expenditure for the year.

1. All eligible R&D expenditure up to 2% R&D Intensity will receive a non-refundable R&D tax offset equal to your corporate tax rate plus 8.5% premium.
2. Additional eligible R&D expenditure above 2% R&D Intensity will receive a non-refundable R&D tax offset of your corporate tax rate plus 16.5% premium.

Following is an illustration of the difference in tax payable by including the R&D Tax Incentive claim is your company’s income tax return (assume company turnover less than $20m) :

You can see from the above the financial benefit the R&D Tax Incentive can generate (benefit is $27,750), in addition to the benefit that the R&D expenditure is generating for the future of your company. This may provide some of the funds to re-invest in R&D the following year.

If you have any questions regarding the R&D Tax Incentive, or would like to be connected with an R&D consultant, please contact the office or email michelle@tellerygroup.com.

Appendix 1 – From Department of Industry, Innovation and Science

List of Excluded Core Activities

• Market research, market testing or market development, including customer surveys, and sales promotion;
• Prospecting, exploring or drilling for minerals or petroleum for the purposes discovering deposits, determining more precisely the location of the deposits and/or including the size or quality of deposits;
• Management studies or efficiency surveys;
• Research in social sciences, arts or humanities;
• Commercial, legal and administrative aspects of patenting, licencing or other activities;
• Activities associated with complying with statutory requirements/standards, including:
  • maintaining national standards
  • calibrating secondary standards
  • routine testing and analysis of materials, components, products, processes, soils, atmospheres and other things;
• Any activity related to the reproduction of a commercial product or process by a physical examination of the existing system and/or from plans, blueprints, detailed specifications or publicly available information;
• Developing, modifying or customising computer software. Software where the dominant purpose is use by any of the following entities for their internal administration (including the internal administration of their business functions):
  • the entity or developer for which the software is developed, modified of customised;
  • an entity connected with the developer;
  • an affiliate of the developer, or an entity of which the developer is an affiliate.

Examples of Supporting Activities that do not usually have a direct relationship to R&D Core Activities

• Conducting a literature review or internet search to identify a market niche for a new product;
• Cleaning and maintaining equipment that you do not use for an experiment;
• Decommissioning and dismantling equipment that you did not use to conduct experiments.