Australian R&D Tax Incentive

What is Australian Research and Development Tax Incentive ?

Research and development is often the first important step in innovation. It makes technological improvements that improve productivity and increase economic growth.

The Research and Development (R&D) tax incentive is the government's principal mechanism for encouraging Australian industry investment in research and development. The Australian government provides incentives for companies to engage in research and development. The program is jointly administered by the Australian Taxation Office and AusIndustry. Businesses must register Research and Development activities with AusIndustry each year before claiming for a tax offset with the Australian Taxation Office (ATO).

The R&D tax incentive or R&DTI helps companies grow and innovate by offsetting some of the costs of qualified research and development, which generates benefits for the Australian economy. R&D provides tax offsets for companies conducting tax-incentive research and development activities. R&D tax incentives can be an opportunity to collaborate with Registered Research Service Providers (RSPs). Research and development activities conducted overseas are eligible under certain circumstances.

How the R&D Tax Incentive Works ?

R&D tax incentive is a tax credit received on filing an Australian corporate tax return that covers expenses and allows organizations to reinvest more capital into themselves. Depending on the annual turnover of the company, R&D tax incentive provides either refundable or non-refundable tax offset.
  • 43.5% refundable tax offset for companies with annual turnover of less than $20 million.
  • 38.5% non-refundable tax offset for companies with annual turnover of more than $20 million.
The refundable tax offset is not dependent on the company which has income tax liability for the year. Tax offset can be refunded in cash if the company does not have tax liability.

Turnover of less than $20 million :

For R&D entities with a total turnover of less than $20 million, the refundable Research and Development tax offset is your corporate tax rate plus an 18.5% premium.

Turnover of $20 million or more :

For R&D entities with a total turnover of $20 million or more, the non-refundable Research and Development tax offset is your corporate tax rate plus an incremental premium. Premium growth is based on your research and development intensity. This is a percentage of your eligible R&D expenses as a proportion of your total expenses for the year.
  • All eligible R&D expenses up to a 2% Research and Development intensity will receive a non-refundable R&D tax offset equal to your corporate tax rate plus an 8.5% premium.
  • Eligible R&D expenses in excess of the 2% Research and Development intensity will receive your corporate tax rate plus a non-refundable R&D tax offset of the 16.5% premium.

How the R&DTI is Administered ?

The Australian Taxation Office (ATO) and Industry Innovation and Science Australia (IISA) are jointly responsible for the administration of tax incentives. The ATO manages eligible costs and regulations for institutions and the department assists IISA in registering Research and Development activities. Each year Industry Innovation and Science Australia reports on tax incentives in its annual report. The budget effects of tax incentives (refundable and non-refundable tax offsets) are reported annually in the Science, Research and Innovation budget tables.

Who is Eligible for R&D Tax Incentive ?

Your estimated deduction for one income year must be at least $20,000 to be eligible for tax. You can still apply for an offset if your eligible R&D expense is less than $20,000. However, you must use a Registered Research Service Provider (RSP) to conduct your R&D.
A company has to fulfill various conditions to be eligible for RDTI. There are also different norms for companies sub-contracting R&D activities to another entity.

Key Criteria for R&D Tax Incentive :

The prerequisites that must be met include the following :
  • The applicant must be an Australian tax resident company.
  • Research and Development activities must be conducted in Australia.
  • The company must incur at least AUD $20,000 of qualified Research and Development expenses during the income year, which includes core and ancillary R&D activities.
  • There is a $150 million limit on R&D tax incentive claims for eligible R&D activities conducted. This means that you cannot get any further tax benefits for amounts over $150 million.

Eligible Entities :

You are a Research and Development entity if you are any of the following corporations :
  • One must join under Australian law.
  • Incorporated under a foreign law but must be an Australian resident for income tax purposes.
  • Incorporated under a foreign law and you are both :
  1. Must be a resident of a country with which Australia has a double tax agreement that includes the definition of a permanent establishment.
  2. Must conduct business in Australia through a permanent establishment as defined in the Double Tax Agreement.
You may also need to consider the special rules applicable to consolidated groups and research and development partnerships, if you are a research and development entity.

Member of a Consolidated Group or a Multiple Entry Consolidated (MEC) Group :
  • If you are the principal company of a consolidated group or MEC group, your subsidiaries are treated as part of you as long as they continue to be part of the consolidated or MEC group for income tax purposes.
  • Research and Development tax incentives are applicable to your Consolidated Group or MEC Group as if it is a single entity conducting all Research and Development activities within the Group.
  • Only the group's flagship company should register and claim tax incentives for these R&D activities.

Partners in an Research and Development partnership :
  • Research and Development Partnership is one where each partner fulfills the definition of an R&D entity.
  • The partnership itself is not eligible to claim this incentive for its R&D activities as it is not a Research and Development entity.
  • Each partner is required to register the Research and Development activities that they conducted as part of the partnership.

Criteria for Subcontracted R&D Activities :

If the Research and Development activities are sub-contracted to any other institution, then the applicant of RDTI has to fulfill the following conditions :
  • Applicant must own or have the right to exploit any intellectual property arising out of R&D activities.
  • The applicant should bear the financial risk of conducting R&D activities.
  • Applicant must control, how R&D activities are carried out.
Multinational corporations may require certain written agreements before conducting R&D activities. The nature of the agreements depends on the corporate structure and who owns the intellectual property.

Not Eligible for R&D Tax Incentive :

You are not a qualified R&D entity if you :
  • Individual
  • Corporate limited partnership
  • Exempt entity (where your entire income is exempt from income tax)
  • Trust (except a public business trust with a corporate trustee)

Understanding Qualified R&D Activities

The Australian R&D Tax Incentive Program supports R&D activities that can be shown to follow a set of specific tasks. These actions must meet the requirements set forth in the definition of an eligible Research and Development activity. Qualified R&D activities are defined in the legislation that outlines the programme.

Eligible Activities :

For each year that you intend to register, you must conduct at least one activity that meets the definition of a core R&D activity. You need to self-evaluate your R&D activities against legislative requirements.

Self-assessment :

It is your responsibility to register and ensure that your claim for the Research and Development Tax Incentive is accurate. Learn to self-assess if your R&D activities are eligible.

Eligible R&D Expenditure

Expenses incurred on your registered Research and Development activities can be claimed through tax offset. You need to self-assess whether your expenses qualify under the program before you can claim them through your company tax return with the ATO.
What Qualifies As R&D Expenditure ?
Subcontracted R&D, direct and externally provided staff, software, consumables, prototyping, trials and independent research costs may all qualify for R&D relief. Capital expenditure is not eligible under this scheme, nor is the expenditure on distribution and production of goods and services.

Examples of Qualified R&D Expenses :
  • Contractor expenses.
  • Employee Wages and Salary.
  • Labor at costs like pension and payroll taxes.
  • Depreciation of plant and equipment.
  • Expenditure on Contract Research Organizations.
  • Expenditure on research service providers and cooperative research centers.
  • Overhead expenses including rent, electricity and internet.
  • Travel expenses from attending technical conferences or on-site testing.

How Much is the R&D Tax Incentive ?

The Research and Development tax incentive offers a tax exemption of between 18.5% and 43.5% for most companies. If you spend $100,000 on developing a new product, you can return between $18,500 and $43,500, depending on the company's revenue and profitability.

Steps to Follow for R&D Tax Incentive

Applying for R&D Tax Incentive is an annual process. The following steps should be reviewed as part of the application process.

Step 1: Make a self-assessment of your eligibility while planning your R&D :
If you are a qualified R&D entity under the program, you should first do a self-assessment. You will then need to review your planned research and development and self-assess each activity for eligibility under the definition.

Step 2: Consider Applying for Overseas or Advance Finding :
To claim R&D activities conducted overseas, you must ensure that they are qualified by obtaining the mandatory overseas search. To make sure your activities are eligible, before registering, you can apply for an advance search.

Step 3: Continue to do self-assessment and keep records :
One should continue to self-assess their eligibility while doing research and development and before applying for registration. Make sure you keep records during and after each activity.

Step 4: Register for the R&D Tax Incentive Program :
If you are an eligible entity, you have been assessed and are conducting eligible activities, apply to register for this program.

Step 5: Claim Tax Offset :
In order to claim your tax offset, you need to enter your registration number in the Research and Development Schedule of your company's annual income tax return. You should then file your tax return on the ATO-External site.

How to Apply for R&D Tax Incentive ?

To apply under R&DTI, you have to access the customer portal. To get access to this, your myGovID must be linked to the company ABN. You may consider doing so when you review Research and Development tax incentive guidance. We have provided information to assist you in this process.

Apply for Registration with R&D Tax Incentives :

If you are starting your application in the customer portal, read the pre-registration checklist before submitting. R&DTI has an updated application process. You are able to submit your application using the R&D Tax Incentive Customer Portal.

Use the R&D Tax Incentive Customer Portal to apply to register your R&D activities :

What is R&D Tax Incentive Customer Portal ?

The Research and Development Tax Incentive Customer Portal is an online place to manage your interactions with the R&DTI Program. You can use this portal to apply for and manage R&D tax incentive applications and advance or overseas search applications. Using this portal you can apply for extension of time, request withdrawal or change of your application and also check the status of your submitted applications.
  • You can find out more about R&D tax incentives on the website. (R&D Tax Incentive portal)
  • For more help using the Customer Portal, please visit the Help page.

How to Login to Customer Portal ?

To be able to log in to the R&D Tax Incentive customer portal, you need to be authorized. Guidance has been prepared for each of the following :

R&D Tax Incentive Program Contacts

Your question can be answered via phone, email or webchat: