Supercharge your business - the ultimate guide to claiming R&D tax incentives in Australia

Innovation is at the heart of every successful business.

From developing new products and services to improving existing ones, companies are seeking ways to stay ahead of the competition.

However, innovation requires investment, and this is where the Australian R&D Tax Incentive comes into play.

This incentive provides a valuable opportunity for companies to claim tax offsets or cash refunds for their eligible R&D activities, helping to fuel innovation and growth across a wide range of industries and the Australian economy.

In this article, we’ll explore the ins and outs of this incentive, including how it works, who is eligible, and how companies can claim it.

Whether you’re a startup or an established business, understanding the R&D Tax Incentive can help you unlock new opportunities for innovation and success.

What is the R&D Incentive?

The R&D Tax Incentive provides a tax offset to eligible companies that engage in R&D activities in Australia. The offset is available to companies of all sizes and across all sectors of the economy.

This incentive is the primary government program encouraging companies across all Australian industries, by providing incentives for engaging in research and development activities.

It is jointly administered by the Australian Taxation Office (ATO) and the Department of Industry, Science, Energy and Resources (DISER).

What types of R&D activities are under the R&D tax incentive?

Is your R&D an eligible for activity in Australia?

• Developing new or improved materials, products or processes.
• Systems or software development that are innovative and require significant technical expertise.
• Conducting experiments to test new materials, substances, or technologies.
• Designing and prototyping new products or devices.
• Conducting research into new scientific or technological concepts or theories.
• Investigating and overcoming technical challenges related to scaling up production or improving efficiency.
• Developing new or improved method for testing, analysis, or data processing.
• Developing new or improved method for environmental sustainability, energy efficiency, or renewable energy.
• Developing new or improved methods for healthcare, medical treatments, or clinical trials.
• Investigating the feasibility of a new technology or product.

How much is the R&D tax incentive? How much do you get back with R&D?

The program provides a tax offset from 8.5% to 43.5% for eligible R&D expenses for companies with an aggregated turnover of less than $20 million per year.

For larger companies, the offset is up to 38.5%.

In addition to the tax offset, the program offers a cash refund option for eligible companies that are not yet profitable.

How does the R&D incentive work?

These figures sound great, so how does the incentive work for your business?

Here is how the incentive works in Australia –

Eligibility

A company must be registered with the Australian Taxation Office (ATO) and conduct eligible R&D activities, such as software development, incurring eligible R&D expenses, and meeting the definition of eligible entities.

R&D activities

Eligible R&D activities involve systematic and investigative activities to generate new knowledge or to improve or develop new products, processes, devices, or services (see the comprehensive list above). The activities must be aimed at solving technical problems and must involve a degree of novelty and innovation.

Eligible expenses

Eligible R&D expenses include expenses related to conducting eligible R&D activities, such as salaries, wages, and contractor fees, and materials, equipment, and software used in the R&D process.

Tax offset

Companies can claim a tax offset of up to 43.5% of eligible R&D expenses if their annual turnover is less than $20 million, and up to 38.5% if their annual aggregated turnover is more than $20 million. The company use the offset to reduce their income tax liability or to receive a cash refund if the company is not yet profitable.

Application

Companies must apply for the R&D Tax Incentive in their annual income tax return. They must provide details of their eligible R&D activities and expenses and must provide evidence to support their claims.

Are you eligible for the R&D incentive?

Can your company claim the incentive?

In Australia, the R&D Tax Incentive is available to all companies conducting eligible R&D activities, regardless of their size or industry sector, conducting eligible research and development (R&D) activities.

However, to be eligible, a company must meet certain criteria –

Type of entity

It is available to all Australian-based companies incorporated under Australian law, as well as certain other entities, such as partnerships, trusts, and sole traders. Entities that are exempt from income tax are not eligible for the program.

R&D activities

A company must be engaged in eligible R&D activities. Eligible activities involve systematic, investigative, and experimental activities to generate new knowledge or improve existing products, processes, devices, or services. The activities must also involve a degree of novelty and innovation.

R&D expenditure

The company must incur eligible R&D expenditure in the year in which they are claiming the R&D Tax Incentive. Eligible expenditure includes expenses related to conducting eligible R&D activities, such as salaries, wages, and contractor fees, materials, equipment, and software used in the R&D process.

Registration

Companies must register their eligible R&D activities with the Australian Taxation Office (ATO) before claiming the R&D Tax Incentive. The registration must be complete by the deadline specified by the ATO.

How is the R&D incentive calculated?

The R&D Tax Incentive in Australia is calculated as a tax offset for eligible research and development (R&D) expenses. The amount of the refundable tax offset a company can claim depends on the size of the company and the level of R&D expenditure incur. Here’s how the R&D Tax Incentive is calculated in Australia:

Eligible R&D expenses

To be eligible for the research and development tax incentive, a company must incur eligible R&D expenses during the year in which they are claiming the incentive. Eligible expenses include expenses related to conducting eligible R&D activities, such as salaries, wages, and contractor fees, as well as expenses related to materials, equipment, and software used in the R&D process.

Tax offset rate

The rate of the R&D Tax Incentive that a company can claim depends on the size of the company and the amount of eligible R&D expenditure incurred. Companies with an annual aggregated turnover of less than $20 million can claim a refundable tax offset of up to 43.5% of eligible R&D expenses, while companies with an annual turnover of $20 million or more can claim a tax offset of up to 38.5% of eligible R&D expenses.

Cash refund

Claim a cash refund of the remaining incentive, if a company is not yet profitable or has a tax liability that is less than the amount of the R&D Tax Incentive that it is entitled to claim.

Registration

Companies must register their eligible R&D activities with the Australian Taxation Office (ATO) before claiming the research and development tax incentive. The registration must be complete by the ATO deadline.

Let’s consider an example, to explain this further –

Say your company has an annual aggregated turnover of less than $20 million and has incurred $1 million in eligible R&D expenses, it could potentially claim a refundable tax offset of up to $435,000 (i.e., 43.5% of $1 million).

If your company does not have any tax liability or has a tax liability of less than $435,000, it may be eligible for a cash refund of the remaining amount of the tax offset.

Sounds exciting, doesn’t it? Let’s now see how you can claim this incentive.

How do you claim the R&D incentive?

To claim compliance with the research and development tax in Australia, companies must follow the tax incentive application, registration, and lodgement process outlined by the Australian Taxation Office (ATO).

Follow these steps to claim your R&D Tax Incentive:

Step 1: Register your R&D activities

Companies must register their eligible R&D activities with the ATO by lodging an R&D Registration Form. This form provides details about the nature of the R&D activities, the expenditure incurred, and the expected outcomes. Companies must register their R&D activities within 10 months of the end of the financial year in which the activities were conducted.

Step 2: Lodge your R&D Tax Incentive Schedule

After registering their R&D activities, companies must complete the R&D Tax Incentive Schedule as part of their annual income tax return. The schedule requires companies to provide information about their R&D expenditure and the tax offset that they are claiming. Companies must lodge their tax return by the due date, which is generally 31 October for companies not using a tax agent.

Step 3: Conduct an R&D audit

The ATO may select companies for an R&D audit to verify the eligibility of their R&D activities and expenditure. Companies selected for an audit must provide additional documentation and evidence to support their R&D claim.

Step 4: Receive your tax offset or cash refund

If the R&D tax incentive claim is approved, the company will receive a refundable tax offset or a cash refund. The tax offset can be used to reduce the company’s tax liability, while the cash refund will be paid to the company if it has a tax liability that is less than the amount of the tax offset.

It’s important to note that the Research & Development Tax Incentive can be complex, and companies seeking to claim the incentive should seek advice from a qualified professional, such as a registered tax agent.

Here’s an example of how a business can claim the R&D Tax incentive in Australia

Let’s consider the case of a hypothetical Australian company, Sunny Dispositions Solar Co., which develops and manufactures solar panels.

Sunny Dispositions Solar Co. invests a significant amount of money each year in R&D activities to improve the efficiency and performance of its solar panels. It meets the criteria for eligible entities.

Here’s how the company could claim the R&D Tax Incentive in Australia:

Registers its R&D activities

Sunny Dispositions Solar Co. identifies its eligible R&D activities, which include developing new and improved materials and coatings for the solar panels, testing new manufacturing processes, software development and conducting trials and experiments to improve the panek performance.

The company registers these R&D activities with the ATO by lodging an R&D Registration Form by the deadline of 10 months after the end of the financial year.

Lodges an R&D Tax Incentive Schedule

The company completes the R&D Tax Incentive Schedule as part of its annual income tax return.

The schedule outlines the eligible R&D activities during the financial year, the amount of R&D total expenditure incurred, and the amount of the tax offset.

Sunny Dispositions Solar Co. lodges its tax return by the due date of 31 October.

Conducts an R&D audit

The ATO selects Sunny Dispositions Solar Co. for an R&D audit to verify the eligibility of its R&D activities and expenditure.

The company provides additional documentation and evidence to support its R&D claims, such as research reports, trial data, and supplier invoices.

Receives a tax offset or a cash refund

The ATO approves Sunny Dispositions Solar Co. R&D claim, and the company receives a tax offset or cash refund.

Let’s say Sunny Dispositions Solar Co. incurred $500,000 in eligible R&D total expenditure during the financial year and is claiming a tax offset rate based on 43.5%.

The company would receive a tax offset of $217,500, which it can use to reduce its tax liability.

Depending on the company tax rate, if the tax liability is less than $217,500, it can receive the difference as a cash refund or tax credits.

How Sleek can help you with R&D incentive

By leveraging its expertise in accounting, tax, and technology, Sleek can assist your company with your Australian government grants and R&D Tax Incentive claims in Australia in several ways:

Help you to identify eligible R&D activity

Sleek works with your company to identify its eligible R&D activities and ensure that they meet the eligibility criteria set by the Australian government. This involves reviewing your company’s R&D projects and documentation, and identifying which activities are likely to qualify for the R&D Tax Incentive.

Prepare your R&D Tax Incentive Schedule

Sleek can assist your company in successfully preparing applications for the Research & Development Tax Incentive Schedule, which is a crucial part of the R&D claim process.

The schedule outlines the eligible R&D activities conducted during the financial year, the amount of R&D expenditure incurred, and the amount of the tax offset being claimed.

Maximise your R&D tax offset claims

Make the most of what’s available. Sleek can help your company maximise its R&D claims by ensuring that all eligible R&D expenditures are included in your claim.

This may include commonly missed expenses such as salaries and wages, contractor fees, consumables, and depreciation of assets used in the R&D activities.

Compliance and Audit support

Sleek can help your company remain compliant with the R&D Tax Incentive requirements and support you in the event of an ATO audit. We’ll ensure all documentation and evidence to support the R&D claim is maintained and accessible.

Technology solutions

We’re all about tech. Sleek can provide technology solutions that help companies streamline their R D tax offset claim process. For example, we can develop a process to enable your company to track their R&D activities and expenditure, generate reports, and submit R&D Tax Incentive claims online.

By leveraging its expertise in accounting, tax, and technology, Sleek Tech can assist companies with their R&D Tax Incentive claims and help them maximise their entitlements while minimising their compliance risks.

If you’re a business owner, it’s important to understand the eligibility criteria and the claims process for the Research & Development Tax Incentive and government grants, as well as the various compliance requirements. Working with experts in accounting and technology, such as Sleek, can assist your company with your R&D Tax Offset Incentive claims and help you maximise your entitlements while minimising your compliance risks.

Call Sleek accountants today on +61 2 9100 0480 or schedule a meeting here.