What is the Research and Development (R&D) Tax Incentive?

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Table of Contents

• Claiming R&D Tax Credits
• Research and Development Tax Claims
• Can My Business Claim R&D Tax Credits?

The Research and Development (R&D) Tax Incentive is a targeted and entitlement-base Federal Government incentive program.  The incentive encourages Australian businesses and companies of all sizes and structures to invest in research and development projects across all industries. The program offers tax credits based on the grouped turnover for the company. This article sets how companies can apply for the tax incentive and who can claim the R&D tax incentive.

Claiming R&D Tax Credits

The refundable R&D tax credit depends on the grouped turnover for the business. If the business’ grouped turnover is less than $20 million, the business can claim 45 per cent in R&D tax credit. There is an additional 15 cents per dollar spent in additional benefit in a tax payable position.

If the business’ grouped turnover is more than $20 million, the business can claim 40 per cent in a non-refundable R&D tax credit. There is an additional 10 cents per dollar spent in additional benefit to reduce tax payable or carry forward if in a tax loss position.

Research and Development Tax Claims

Research and development activities are often related to expanding, improving or developing a business process or idea. At its core, R&D activities must be intended to be experimental and to obtain new knowledge. To qualify for the R&D tax incentive, activities may include:

• Developing a new product, service, technology or process;
• Improving on a product, service, technology or process;
• Participating in testing new products, services, technology or processes;
• Trailing alternative raw materials or new equipment; and
• Implementing new systems to increase the efficiency of operations.

Essentially, the project must have an outcome that is not known in advance from currently available information. There must be a systematic progression of work based on principles of science, and the project must generate new knowledge.

Can My Business Claim R&D Tax Credits?

Any business can be eligible to claim the R&D Tax offset so long as they qualify as a R&D entity. To be an eligible R&D entity, the business must be a company incorporated in Australia, or incorporated in another country but be an Australian resident for tax purposes, or incorporated in a country with which Australia has a double tax arrangement and undertakes activities in R&D through a permanent Australian establishment.

To claim the R&D tax, the business must register the R&D activities and projects on an annual basis. The claims must be lodged within 10 months of the financial year end with the Australian Tax Office (ATO). The lodgment of expenditure forms is the basis that the ATO will determine tax credits.

A business looking to claim R&D tax credits should first identify and assess its R&D activities. From developing a new technology to improving an existing technology, these activities should be recorded and monitored. The validation of a R&D claim will be based on the evidence collected about the activity itself. At the end of the financial year, R&D lodgment documentation should be prepared, along with internal documents to support the R&D claim.