The Research and Development (R&D) Incentive is a program designed to encourage 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 in Australia.
Core incentives offered in Australia
There are two core incentives offered:
|Incentive aimed at||Incentive offered|
|Companies with an aggregated turnover of less than AUD 20 million per annum (provided they are not controlled by income tax-exempt entities)||43.5%* refund on eligible R&D expenditure|
|All other eligible entities||38.5% non-refundable tax offset|
*Subject to change
Entities may be able to carry any unused offset amounts forward to future income years.
A sample calculation of the R&D Incentive for companies with an aggregated revenue of less than AUD 20 million:
|R&D expenditure||AUD 1 million|
|Profit||AUD 0 (or loss)|
|Incentive type||43.5% cash refund|
|Refund amount||AUD 435,000 (43.5% of expenditure)|
Who are eligible entities?
Only R&D entities are eligible to claim an R&D refund. 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.
Your eligibility to claim the R&D refund will also depend on where you are conducting your R&D activities and, importantly, what those activities are.
Where you are conducting your R&D activities
Generally, only R&D activities conducted within Australia qualify for the R&D Incentive, but there are some exceptions. R&D activities conducted overseas can qualify if AusIndustry deems that they meet certain conditions, including:
- The overseas R&D activity must have a ‘significant scientific link’ to core R&D activities 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
- The expenditure on the overseas R&D activity must be less than the expenditure incurred on core R&D activities in Australia
What R&D activities you are conducting
To be eligible for the R&D Incentive, your R&D activities must be classified as either core R&D activities or supporting R&D activities.
- Core 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
- Mineral’s 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
- Supporting R&D activities
Supporting R&D activities are directly related to core R&D activities. Certain activities also qualify if they have been 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.
Qualifications for the refund on eligible R&D activities
To qualify for this incentive of a 43.5% refund 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
- Invest more than AUD 20,000 in eligible R&D
Registering for the R&D incentive
The R&D Incentive is jointly administered by the Australian Tax Office (ATO) and the Department of Industry, Science, Energy and Resources (AusIndustry).
You must register your R&D activities with AusIndustry before you claim the refund. AusIndustry is responsible for determining the eligibility of R&D activities, and the ATO will determine if the expenditure claimed in your tax return for your R&D activities is eligible for the refund.
If your company is an R&D entity and you are interested in claiming an R&D refund in your company’s income tax return, you must first register your R&D activities with AusIndustry.
You must do this:
- For every income year you want to claim the offset
- Within 10 months of the end of your company’s income year
- Prior to claiming the R&D refund in your company income tax return
What is the timeline for claiming the benefit?
Registration for the R&D Incentive must be lodged within 10 months of the end of your company’s financial year and prior to claiming the R&D refund in your company’s income tax return.
For example, if your company uses a financial year ending on 31 December, claims must be lodged by 31 October of the following year.
R&D refunds are processed through the company’s income tax return, with 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 AusIndustry as being capable of providing scientific or technical expertise and resources to perform R&D on behalf of other companies.
The benefits of using an Australian research service provider
- 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 still 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.
The R&D tax incentive in Australia was introduced to encourage businesses to invest in R&D activities. The refund can be up to 43.5% of all eligible R&D expenditure if the company’s aggregated turnover is less than AUD 20 million. If you are interested in registering for the R&D tax incentive, do not hesitate to contact Acclime.
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