The Government will provide tax incentives to encourage businesses to participate in research and development (R&D) that will benefit Australia. It aims to boost competitiveness and productivity across the Australian economy.

What is the R&D Tax Incentive?

The tax incentive provides two different tax offsets that companies may be eligible to apply. The two offsets are:

  • A refundable 45% tax offset for companies not controlled by income tax exempt entities and with an aggregated turnover of less than $20 million per year; and
  • A non-refundable 40% tax offset for all other eligible entities.

Note that the R&D tax offset rate is reduced to the company tax rate for any portion of R&D deductions that exceed $100 million for an income year.

Research and Development

To be eligible, your company must:

  • Be an R&D entity;
  • Have carried out eligible R&D activities;
  • Registered activities with AusIndustry; and
  • Incurred notional deductions of at least $20,000 on eligible R&D activities.

To be an R&D entity, you must be a corporation that is incorporated under Australian law. If you are incorporated under foreign law, you can still be an R&D entity if you are an Australian resident for tax purposes or are both a resident of a country that has a double tax agreement with Australia and is carrying on business in Australia.

In general, R&D activities must be conducted in Australia to qualify. These activities must be either core or supporting R&D activities. Broadly, the differences are that:

  • Core R&D activities are experiments whose outcome cannot be determined in advance and are done to generate new knowledge;
  • Supporting R&D activities are directly related to and are being undertaken for the purpose of supporting core R&D activities, e.g. producing goods used in core R&D activities.

Your company’s R&D activities must also be registered with AusIndustry before claiming the tax offset in order to be eligible. This needs to be registered for every income year that you want to claim the tax incentive and within ten months of the end of your company’s income year.  Finally, in calculating your notional deductions, you may take into account:

  • Expenditure incurred on R&D activities;
  • Decline in value of assets used for R&D activities;
  • Feedstock expenditure; and
  • Balancing adjustments for assets used in R&D activities (e.g. partnership assets).

If your total notional deductions are less than $20,000, you may still be able to obtain the tax incentive for some specific expenditures.

How Can a Small Business Apply?

The tax incentive is based on self-assessment, with the onus on the company wishing to claim the offset and to prove the claims you have made. In your self-assessment, you should:

  • Calculate your aggregated turnover to work out whether you can claim the refundable 45% or the non-refundable 40% tax offset; and
  • Calculate your tax offset.

Once you have done your self-assessment, you must also lodge your claim yourself by completing an R&D tax incentive schedule and lodging it online with the ATO. It will then be up to the ATO and AusIndustry to verify if the expenditure claimed is eligible for the R&D tax offset.

Key Takeaways

For businesses looking to claim the R&D tax incentive, it is important to ensure that you meet the eligibility criteria and that you have performed a self-assessment on your R&D activities before lodging your claim. If you have any questions or need assistance with applying for your R&D tax incentive, get in touch with a business lawyer at LegalVision.

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