R&D Tax Incentive – get generous tax offsets for your business
Our 5-minute guide to determine if it’s right for your business.
Are you a pioneer in innovation and development?
Does your business create new or improved products, systems, devices, services, and processes?
Could your business benefit from tax offsets of up to 43.5% for every dollar you invest in these projects?
Well, the Australian government is encouraging your R&D investment to help your company to grow and innovate.
R&D is a powerhouse for success. This type of investment not only generates enormous benefits for your business but for your industry and the Australian economy.
- What is the R&D tax incentive in Australia?
- Is your business eligible for the R&D tax incentive?
- What activities are eligible for the R&D tax incentive?
- What are excluded R&D tax incentive activities?
- What expenses are eligible to claim through the R&DTI?
- What expenses can I not claim through the R&DTI?
- How much is the R&D tax credit?
- How do I claim the R&D tax incentive?
- Can I claim the R&DTI every year?
- What records do you need to keep to claim the R&D tax credits?
What is the R&D tax incentive in Australia?
The Research and Development Tax Incentive (R&DTI) offers a tax offset for companies conducting eligible R&D activities.
This tax incentive is administered by the office of Industry, Innovation and Science Australia (IISA) and the Australian Taxation Office (ATO).
Most western economies offer a version of the tax incentive, so it’s important that you research and investigate the regulations of the Australian R&D Tax Incentive, so you have the facts.
Alternatively, you are most welcome to check with our R&D tax consultants here at Sleek.
Before you head out, excited that your R&D project could be offset, let’s take a look if your business is eligible.
Then we’ll explore the R&DTI to see how it can work for your business.
Is your business eligible for the R&D tax incentive?
Here’s the checklist to see if your business is eligible for the R&DTI:
- Is your business incorporated under Australian law?
- or is your business incorporated under a foreign law but an Australian resident for income tax purposes?
- or is your business incorporated under foreign law and is both:
- a resident of a country with which Australia has a double tax agreement that includes a definition of ‘permanent establishment’.
- carrying on business in Australia through a permanent establishment as defined in the relevant double tax agreement.
Now that you can tick your business is eligible, it’s time to dive into the tax incentive a little deeper, so you make an informed decision as to how your business is going to use it to its full benefit.
What activities are eligible for the R&D tax incentive?
Your R&D activities must meet certain criteria to be eligible to claim the R&DTI.
This criterion is divided into 2 sections:
1. Core R&D Activities
These are experimental research and development activities:
- whose outcome cannot be known or determined in advance based on current knowledge, information or experience, but can only be determined by applying a systematic progression of work that is based on principles of established science; and
- proceeds from hypothesis to experiment, observation, and evaluation, and leads to logical conclusions
Put simply, you must be seeking to gain new knowledge (including improved materials, products, devices, processes or services) in the field by experimenting.
2. Supporting R&D Activities
A supporting R&D activity is one that is directly related to core R&D activities or to certain activities has been undertaken for the dominant purpose of supporting core R&D activities.
These supporting R&D activities that satisfy the dominant purpose requirement are those that either:
- Produce – or are directly related to producing – goods or services or,
- Are excluded from being core R&D activities.
Think we need an example here of a supporting R&D activity, don’t we?
These include the cleaning and maintenance of the equipment you use in your core R&D activity; a literature review to refine your hypothesis before you conduct your experiment (your core R&D activity) or the decommissioning and dismantling of equipment used in experiments after you have reached logical conclusions.
It’s important to note here that your business is solely responsible for the project, you will bear the risks of the R&D activities.
These activities will be conducted for your business, not for another entity. To help you determine this, answer the question – who will own the results of the R&D?
What are excluded R&D tax incentive activities?
It may be helpful to check out what types of activities are excluded from being Core R&D Activities.
Some examples of activities excluded from the R&DTI include market research, consumer surveys, management studies, activities associated with statutory requirements and standards, or developing or modifying computer software.
Keep in mind, your activity may be excluded from Core Activities, but it could be an eligible Supporting Activity.
What expenses are eligible to claim through the R&DTI?
You can claim expenses that were incurred specifically on your R&D activities, with a minimum spend of $20,000.
Expense examples include:
The cost of staff or third parties such as consultants, labour hire needed to run and manage the R&D activity
Overheads – these include rental of premises, electricity, travel, administration, and insurance
Consumables used in your R&D activity, such as chemicals or packaging.
Depreciation of assets used in your core R&D activity such as machinery, equipment or vehicles.
Good record keeping is a must, so you can show that the expenses you have claimed are directly related to the R&D project. See our question below ‘What records do you need to keep to claim the R&DTI?
What expenses can I not claim through the R&DTI?
Your business cannot claim general operating expenses that you would have incurred regardless of the R&D project. These include expenses such as marketing expenses, or delivery charges, and purchase of inventory.
How much is the R&D tax credit?
This all sounds great, doesn’t it? But what is the rate of R&D tax incentive offset?
There are two tax incentives according to the size of your entity:
A turnover of less than $20 million
If your eligible entity has an aggregated turnover of less than $20 million per annum (provided you are not controlled by income tax-exempt entities) your refundable tax offset is equal to your entity’s company tax rate plus an 18.5% premium.
This means for 2022-23, if your company tax rate is 25%, add the 18.5% premium – this equates to a 43.5% tax offset!
A turnover of more than $20 million
For all other eligible entities, you can claim a non-refundable tax offset which is equal to the entity’s tax rate plus a two-tiered premium determined on the notional R&D expenditure as a proportion of total expenditure for the income year. The new rates will be the company tax rate plus:
- 8.5% for R&D expenditure up to 2% of total expenditure
- 16.5% for R&D expenditure above 2% of total expenditure.
Entities may be able to carry forward unused offset amounts to future income years.
How do I claim the R&D tax incentive?
Follow the steps to claim your R&DTI:
- Step 1 – Are you an eligible R&D entity?
- Step 2 – Is your R&D activity eligible?
- Step 3 – Is your R&D expenditure eligible?
Step 4 – Do you have evidence to support your R&D claim?
- Step 5 – Apply to register with AusIndustry within ten months of the end of the financial year during which you completed the R&D activities.
Remember, you must apply for registration each year you conduct R&D activities.
- Step 6 – Receive your R&DTI registration number
- Step 7 – Claim your tax offset in your financial accounts.
Can I claim the R&DTI every year?
Yes, you can claim R&D tax credits every year so long as you have undertaken eligible R&D activities within that year’s accounting period.
Before you set off organising your R&D tax incentive, there’s some paperwork your business has to collect.
What records do you need to keep to claim the R&D tax credits?
Your business will need comprehensive records of how your activities are eligible such as:
- How you could not know or determine the outcome in advance
- How your R&D activities follow a systematic progression of work from hypothesis through to experiment, observation, evaluation and logical conclusions.
- How the substantial purpose of conducting the activity was to generate new knowledge.
- If you are claiming supporting R&D activities, you will need to show how these activities directly relate to at least one core R&D activity.
The R&DTI is self-assessed, so good record-keeping is important to substantiate your tax incentive.
Excited about the R&D tax incentive? There’s a lot to know about this tax offset, so it may be wise to engage R&DTI experts at Sleek to help you navigate the ins and outs.
R&D tax incentive not quite fit for your business? There are other programs created to help your Australian business prosper – perhaps these may be helpful?
The Export Market Development Grant (EMDG) is designed to assist your business to take your product or IP to a global market.
There’s also the Accelerating Commercialisation Grant where your assigned facilitator will make recommendations to take your business project to its first commercial sales and help you apply for the commercialisation grant!