The R&D Tax Incentive program in Australia.

The Research and Development Tax Incentive (R&DTI) is a program designed to incentivise eligible entities to conduct/carry out eligible R&D activities in Australia. This guide aims to help you better understand the R&DTI.

In order to avail the R&DTI, there are three initial eligibility criteria that need to be met:

• An R&D Entity – this can be an Australian incorporated company;
• Eligible R&D activities – Core R&D activities and Supporting R&D activities; and
• Eligible expenditure – primarily expenditure related to R&D activities conducted in Australia.

Tax rates

* Companies may be able to carry any unused non-refundable offset amounts forward to offset income tax liabilities in 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.

Sample calculation

A sample calculation, as a guide, of the R&DTI for companies with an aggregated turnover of less than AUD 20 million:

Eligible entities for the R&D Tax Incentive

Only R&D entities are eligible to claim the R&DTI. 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.

Eligible activities

To be eligible for the R&DTI, 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
• 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&DTI, but there are some exceptions. R&D activities conducted overseas may qualify if the Department of Industry, Science, Energy & Resources (formerly known as AusIndustry). This requires preparation and submission of an Overseas Finding Application and the overseas activities must meet the specific conditions below:

1. The overseas R&D activity must have a ‘significant scientific link’ to core R&D activities that are wholly conducted in Australia; and
2. 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***
3. 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.

As there are very strict conditions and rules regarding an Overseas Finding there are no guarantees it will be granted by the Department. Further, the recent ATO guidance regarding Overseas Findings will also need to be considered before seeking an Overseas Finding Application.

Criteria for the refundable tax offset

To qualify for the 43.5% or 48.5% 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
• Invest more than AUD 20,000 in eligible R&D

Registering for the R&D Tax Incentive

The R&DTI 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&DTI. 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.

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
• 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 eight to twelve 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.