The Research and Development (R&D) Incentive is a program designed to attract companies to conduct eligible R&D activities in Australia. In this guide, we aim to provide readers with a better understanding of the R&D tax incentive.
The tax rates
Companies with an aggregated turnover of less than AUD 20 million per annum (provided they are not controlled by income tax-exempt entities)
From 43.5% to 48.5% refundable tax offset depending upon the tax rate:
The exact amount is based the company’s corporate income tax rate (25% to 30%) plus:
· 18.5 percentage points
Companies with an aggregated turnover of more than AUD 20 million per annum (provided they are not controlled by income tax-exempt entities)
From 38.5% to 46.% non-refundable tax offset*:
The rates are based the company’s corporate income tax rate (25% to 30%) plus:
· 8.5 percentage points for R&D expenditure up to 2% R&D intensity**; and
· 16.5 percentage points for R&D expenditure above 2% R&D intensity.
* Companies may be able to carry any unused non-refundable offset amounts forward to future income years.
** R&D intensity is defined as the amount of R&D expenditure the company is conducting in Australia as a proportion of total expenditure for the year.
A sample calculation of the R&D Tax Incentive for companies with an aggregated turnover of less than AUD 20 million:
Eligible R&D expenditure
AUD 1 million
AUD 0 (or loss)
AUD 435,000 (43.5% of eligible R&D expenditure
What entities are eligible?
Only R&D entities are eligible to claim the R&D Tax Incentive. R&D entities include any of the following:
- A company incorporated under Australian law
- A company incorporated under a foreign law but an Australian resident for income tax purposes
- A company incorporated under a foreign law, and you are both:
- A resident of a country that Australia has a double tax agreement with that includes a definition of permanent establishment
- Undertaking business in Australia through a permanent establishment as defined in the double tax agreement
The following are not considered R&D entities and therefore will not be eligible for an R&D refund:
- An individual
- A corporate limited partnership
- An exempt entity (where your entire income is exempt from income tax)
- A trust (except for a public trading trust with a corporate trustee)
If you are an R&D entity, you may also need to consider the special rules applied to consolidated groups and R&D partnerships. Other conditions may also apply, depending on whose behalf you are conducting the R&D activities.
What are eligible activities?
To be eligible for the R&D Tax Incentive, your R&D activities must be classified as either core R&D activities or supporting R&D activities.
Core R&D activities are experimental activities:
- Whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, and can only be determined by applying a systematic progression of work that:
- Is based on principles of established science
- Proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions
- That are conducted for the purpose of generating new knowledge (including improved materials, products, devices, processes or services)
Some of the activities that are specifically excluded from being classified as core R&D activities are:
- Market research or testing for sales promotion
- Minerals exploration
- Management studies or efficiency surveys
- Research in social sciences, arts or humanities
- Complying with statutory requirements or standards
- Reverse engineering
- Computer software for internal administration
However, these activities may be considered supporting activities if their dominant purpose is to support a core activity.
Supporting R&D activities
Supporting R&D activities are activities that are:
- directly related to core R&D activities, or
- are undertaken for the dominant purpose of supporting core R&D activities.
Activities that must satisfy the dominant purpose requirement are those that produce, or are directly related to producing, goods or services; or are excluded from being core R&D activities.
Where are you conducting your R&D activities?
Generally, only R&D activities conducted within Australia qualify for the R&D Tax Incentive, but there are some exceptions. R&D activities conducted overseas may qualify if the Department of Industry, Science, Energy & Resources (formerly known as AusIndustry) makes a finding that the activity meets the conditions below:
- The overseas R&D activity must have a ‘significant scientific link’ to core R&D activities that are wholly conducted in Australia;
- The overseas R&D activity must be unable to be conducted in Australia, usually because of lack of access to a facility, expertise, specific population, or equipment in Australia, or if the activities contravene Australian biosecurity laws***; and
- The expenditure on the overseas R&D activity must be less than the expenditure incurred on core R&D activities in Australia.
*** Note that evidence must be provided of the relevant search.
Criteria for the refundable tax offset
To qualify for the 43.5% refundable tax offset on eligible R&D activities, you must:
- Have a registered Australian entity (R&D entity) that incurs all of the costs related to the R&D;
- Have less than AUD 20 million in combined revenue for the Australian subsidiary, overseas parent company and any connected or affiliated entities; and
- Invest more than AUD 20,000 in eligible R&D
Registering for the R&D Tax Incentive
The R&D Tax Incentive is jointly administered by the Australian Tax Office (ATO) and the Department of Industry, Science, Energy & Resources (Department of Industry).
You must register your R&D activities with the Department of Industry before you claim the R&D Tax Incentive. The Department of Industry is responsible for determining the eligibility of R&D activities, and the ATO responsible for administering the eligibility of R&D expenditure claimed in your company’s income tax return.
If your company is an R&D entity and you are interested in claiming the R&D tax offset in your company’s income tax return, you must first register your R&D activities with the Department of Industry.
You must do this for every income year you want to claim the offset.
What is the timeline for claiming the benefit?
You must register your R&D activities by way of an R&D application that must be filed:
- within 10 months of the end of your company’s financial year; and
- prior to claiming the R&D tax offset in your company’s income tax return.
For example, if your company uses a financial year ending on 31 December, the application must be filed by 31 October of the following year.
R&D tax offsets are processed through the company’s income tax return, with any refundable amounts generally paid four to six weeks from the date of lodgement.
Using Australian research service providers
Research Service Providers (RSPs) are entities registered by the Australian government as having the scientific or technical expertise and resources to perform research services on behalf of other companies.
You do not need to engage an RSP in order to claim the R&D Tax Incentive.
The benefits of using an Australian RSP
- RSPs provide companies with access to expertise in Australia’s public and private R&D organisations, and the benefits of services supported by R&D facilities, equipment and infrastructure
- RSPs assist in improving the overall effectiveness of Australia’s R&D effort through collaboration
- Companies using an RSP have the assurance that this entity has met a set of criteria relating to their ability to provide quality R&D services
- Research conducted through an RSP will typically constitute eligible activities and expenditure for the R&D Incentive
Other service providers and in-house research
- Other non-RSP service providers can be engaged to conduct eligible research activities.
- Companies can also conduct their own research in-house, providing it follows the required process to be considered eligible.
If you are interested in claiming the R&D Tax Incentive, do not hesitate to contact Acclime.
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