The R&D Incentive Scheme
The existing R&D Tax Incentive scheme provides two core components:
- a 43.5% refundable tax offset on eligible expenditure for eligible entities less than $20 million turnover, or
- 38.5% non-refundable tax offset for eligible entities with turnover of $20 million or more
For financial years up to 30 June 2016 the refundable offset rate was 45% and the the non-refundable offset rate was 40%.
The research and development tax incentive provides a tax offset for eligible R&D activities and is targeted toward R&D that benefits Australia. The incentive came into effect on 1 July 2011 to replace the former R&D tax concession.
Expenditure below $100m offset reductions
The government reduced the offset rates by 1.5% from 45% to 43.5% and from 40% to 38.5% for the refundable and non-refundable tax offset rates respectively, first flagged in the 2014 Budget.
These rates apply from 1 July 2016. For details of the amending legislation see Budget Savings (Omnibus) Bill 2016.
(Current offset rates are here.)
Quarterly credits abandoned
A government-announced proposal to allow companies with aggregated turnover of less than $20 million to obtain the cash flow benefit of the their R&D offset offset on a quarterly basis, rather than waiting for a tax assessment was intended to commence 1 January 2014. However along with a number of other measures it was confirmed by the Federal Treasurer Joe Hockey in December 2013 that this measure would not proceed.
Deadline for registration
Companies that have undertaken R&D activities during the financial year ended 30 June must register their activities with AusIndustry by the following 30 April to qualify for the R&D Tax Incentive. If the deadline falls on a weekend or public holiday the effective final lodgement date is the next business day.
Non-30 June balancing companies have a registration lodgement date which is the end of the tenth month following the substituted accounting period end.
To be eligible for the R&D tax incentive you must be an R&D entity, engaging in eligible activities and in most cases have notional R&D deductions of at least $20,000.
Registration is required:
- for every income year the offset is claimed
- within 10 months of the end of your company’s income year
- prior to claiming the R&D tax offset in the company income tax return.
‘Eligible activities’ must meet a definition of core R&D activities. Other activities may be eligible as supporting R&D activities.
The Tax Office has issued a number of alerts targeting potentially incorrect R&D tax claims:
- Building or construction activities. TA 2017/2 refers to certain building or construction expenditure which is expressly excluded from being taken into account in calculating an R&D tax offset, or which does not otherwise relate to eligible R&D activities
- Ordinary business activities. TA 2017/3 refers to expenditure which relates to ordinary business activities and not to eligible R&D activities.
- Software development. TA 2017/5 refers to R&D Tax Incentive claims for certain software development costs which are not eligible R&D activities. An addendum to TA 2017/5 seeks to further clarify when routine testing steps in software development projects should not be claimed,
- Ineligible agricultural activities. TA 2017/4 refers to R&D Tax Incentive claims for certain agricultural activities which are not eligible R&D activities. This includes activities carried on by family trusts, such entities not being eligible to claim.
The “At Risk” Rule
The at risk rule requires that for expenditure to be eligible for the R&D tax offset it must be notionally deductible under Division 355 of the Income Tax Assessment Act.
Taxation Ruling TR 2021/5 considers the tests for determining whether expenditure meets the at risk requirements, including for example where R&D activities are connected with commercial contracts for the supply of goods or services.
At Risk Rule for R&D activities subsidised by JobKeeper payments
[22 Dec 2021] Taxation Determination TD 2021/9 outlines the view that an R&D entity triggers the at-risk rule and therefore cannot notionally deduct all or part of its wage expenditure in respect of a JobKeeper payment received.
- TD 2021/9
- Article: Tax implications for R&D activities subsidised by JobKeeper payments (Johnson Winter & Slattery)
Pre July 2011 – and the transition from the R&D tax concession to the R&D tax incentive
Prior to 1 July 2011, the R&D tax concession allowed companies to claim a tax deduction of up to 125% (and in some cases up to 175%) of eligible R&D expenditure.
R&D expenditure incurred in respect of R&D activities performed prior to 1 July 2011, continue to be claimed under the R&D tax concession. See ATO detailed notes.
- R&D Tax Incentive – bulletpoint.com.au
- Developments in R&D: the year in review – PWC 1 April 2016
- ATO Information and Eligibility Guide
- Research and development tax incentive Fact Sheets
- TD 2020/D1 Income tax: notional deductions for research and development activities subsidised by JobKeeper payments
This page was last modified 2021-12-22