The Research & Development Tax Incentive scheme is one of several measures used by the Australian government to incentivise investment in R&D. The R&D Tax Incentive system is implemented by AusIndustry and the Australian Tax Office (ATO). AusIndustry handles the compliance aspects, that is, the determination of whether the applicant complies with the requirements. The ATO determines whether the expenditure claimed in the applicant’s tax return is eligible.

What is on offer?

The rates of the R&D tax incentive offset are set out here.

The incentive has two core components. For income years commencing on or after 1 July 2021, eligible entities (see below) engaged in eligible R&D (see below) may be entitled to:

• A refundable tax offset equal to the entity’s tax rate plus an 18.5% premium for eligible entities with an aggregated turnover of less than $20 million per anum.
• A non-refundable tax offset for all other eligible entities 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 tiers are the 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.

Eligibility

The official guide to eligibilty for R&D tax offsets can be found here.

The eligible R&D deductions must be greater than $20,000,

The applicant must be one of the following legal entities:

1. Incorporated under an Australian law.
2. Incorporated under a foreign law but an Australian resident for income tax purposes.
3. Incorporated under a foreign law, and 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 double tax agreement.

The following are not eligible:

1. An individual.
2. A corporate limited partnership.
3. An exempt entity (entire income is exempt from income tax).
4. A trust (except for a public trading trust with a corporate trustee).

The official guide refers to “Core R&D Activities” that incur eligible expenses. These are:

• Experimental activities with outcomes that a “competent professional can’t know or determine in advance based on current knowledge, information and expertise.
  • These outcomes 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.
• Experimental activities that are conducted for the purpose of generating new knowledge, in the form of new or improved materials, products, devices, processes, or services.

Keep Records

The guide does set out, in some detail the steps that should be taken to claim the R&D tax offset. However, we strongly recommend that you seek the assistance of a consultant because the process can be complicated, and a mistake can be costly. Furthermore, it can be costly and time-consuming to dig out information should the authorities wish to conduct a review of the application.

The consult will require full details of the R&D expenditure. It is therefore important that complete, detailed records be kept of all activities and expenditure related to a particular project. This can be in the form of a simple journal that records the activities and associated costs, or in the form of a dedicated accounting package in which activities and associated expenditure are recorded.

Disclaimer

This post is for general information only and does not constitute advice. We take no responsibility for any consequences resulting from actions taken based on the information provided above. Please get in touch if you require a referral to a consultant.