Australian Government’s R&D Tax Incentive
By Will Elton, Last updated: 2023-01-18 (originally published on 2020-01-13)
Are you an Australian company engaging in R&D activities on a daily basis? Or is your company looking to invest in R&D but cash-strapped? If your answer to one of these questions is yes, the Australian government’s R&D Tax Incentive is what you need. With the introduction of this tax incentive package, R&D is no longer exclusive to big corporations with deep pockets.
Are you eligible?
A company is entitled to claim the tax offset if it satisfies the following criteria:
The company is an eligible R&D entity
An eligible R&D entity can either be a company incorporated under Australian law or a foreign company that is an Australian resident for tax purposes. Trusts are not eligible R&D entities unless it is a public trading trust. Partnerships and JVs are also not eligible R&D entities however the individual incorporated entities within these structures can be eligible.
The company undertakes eligible ‘R&D’ work in the income year
Eligible R&D activities include ‘core R&D activities’ and ‘supporting R&D activities’. To register, your company must engage in at least one core R&D activity. For detailed requirements to qualify as core or supporting R&D activities, you may visit section 355.25 of the Income Tax Assessment Act 1997. But for a brief understanding, eligible R&D work should take on the nature of a scientific experiment, the purpose of which is to generate new knowledge. R&D efforts have to be presentable in the form of a technical idea, through proof of concept and the development of a commercializable prototype. However, some types of activities cannot be counted as core R&D activities, you may refer to section 355(2) for details.
You don’t have to be in the science or technology industries to claim this tax incentive. It is specifically designed for all businesses making endeavours in R&D. The R&D activities in your company can be carried out with the goal to discover new or improved materials, devices, processes and services. For instance, your company’s R&D activities can be aimed at developing new food lines, or devising more effective management structures or inventing recycling and green techniques. Companies in all fields can make use of this tax incentive to improve inefficiency or flaws in their current system.
When trying to determine if your R&D efforts qualify, you can ask yourself these questions:
- Is the outcome of the experiment an unknown based on current technology and information?
- Does the R&D activity employ scientific methods?
- Is the R&D investment aimed at discovering something new and novel?
However, once you start the actual production of your new product or the implementation of a new system based on your R&D discoveries, activities afterwards would fall outside the scope of R&D. For example, efforts in conducting market research, ensuring quality control, fixing bugs or writing training manuals will not be taken into account. In a nutshell, R&D only includes projects in the early stage. And although the tax incentive is generally applicable to industries across the board, research in arts and humanities do not qualify for it.
Successful R&D can bring great rewards and opportunities to the company. However, it’s not rare for R&D attempts to be futile. The approval of your R&D Tax Incentive application does not hinge on an entirely successful outcome of your R&D work. However, payments are made based on the achievement of agreed project milestones. So it is important to set realistic milestones with a reasonable timeline so that you can reimburse the amount spent on each step of the project.
Your company’s total notional deductions for the income year are at least AU$20,000
If your total notional deductions are less than $20,000, you can check out the Co-operative Research Centre (CRC) program or register as a Research Service Provider for other types of tax allowances.
How much is the tax worth?
The value and nature of the offset will depend on the company’s turnover and the degree of R&D expenditure incurred in a given year. There are broadly two categories:
Companies with an aggregated turnover of less than AU$20m
These companies are eligible for the 43.5% Refundable R&D Tax Offset. In the past, most tax offsets introduced by the government can only reduce the amount of tax you pay to zero – which means the excess amount is forfeited even if your tax offsets are greater than your tax liabilities. However, for the new scheme, the excess amount is refundable and goes to your bank account! If your company is in a tax loss position, the new scheme gives you a significant cash flow advantage, when compared with the R&D expenditure increasing a carry forward loss.
Companies with an aggregated turnover over AU$20m or less
These companies are still eligible for a 38.5% non-refundable tax offset.
The annual turnover refers to the total income your company derived in the income year. It also includes the turnover of any entity connected or affiliated with your primary company, except profit generated from transactions between your primary and affiliated company. For companies that only carried on business for part of the income year, a reasonable estimate of the company’s annual income will be applied.
How to claim the tax offset?
The R&D Tax Incentive operates on a self-assessment basis. You have to determine for yourself whether the R&D activities your company is conducting and the amounts you wish to claim do qualify for the scheme. Your application registering your R&D activities must be lodged within 10 months after year-end and before you lodge your company tax return. It is necessary to register separately for each income year that you wish to claim the tax offset.
It is high time we recognised that R&D is not reserved for tech companies and think tanks in laboratories. The tax package is designed to cover a broad range of companies, including commercially-focused operations. By date, over 12,000 companies are claiming entitlements under the R&D Tax Incentive scheme. If your company has these eligible R&D activities, do not hesitate to apply for this tax scheme to relieve your company’s funding pressure.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.