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How the R&D Tax Incentive Tax Offset Works

In its current form, the R&D Tax Incentive is an easily accessed and significant program that can provide generous benefits to eligible companies. In fact, the refundable (‘cash out’) component of Australia’s R&D incentive is the most generous when compared to other OECD countries around the world.

Indeed, the R&D Tax Incentive is the Federal Government’s largest financial program to encourage companies to innovate. It has a minimum spend of $20,000 and is administered jointly by AusIndustry (on behalf of Innovation Australia) and the ATO. For companies with a June 30 financial year-end, they will need to register their R&D activities before April 30. To help companies understand the R&D Tax Incentive, we’ve provided a breakdown of how the program’s tax offset works.

Essentially, the program falls into two broad categories:

1. Companies with an annual turnover of less than $20 million receive a refundable tax offset of 43.5 per cent. For example, if a company spent $20,000 on R&D, then instead of getting the usual 30 per cent deduction for business expenses, they receive a 43.5 per cent deduction. This means they are $2,700 better off by claiming the R&D Tax Offset. If a company is in a loss-making position and spent $20,000 on R&D, then it would receive $8,700 in cash.
2. Companies with an annual turnover of $20 million or more receive a tax offset of 38.5 per cent. For example, if the company spent $20,000 on R&D, its effective tax benefit would be $1,700 – that is the 38.5 per cent offset of $7,700 minus the 30 per cent company tax deduction of $6,000 it would have received anyway. These larger companies in a loss making position cannot get cash back like the smaller ones can, but they can carry forward their offset to use in years when they are making a profit.

Regardless of what offset applies, registration is the critical first step in accessing the R&D Tax Incentive. In order to be able to claim the benefits of the R&D Tax Incentive, a company must register their R&D activities with AusIndustry. Eligible R&D activities typically pertain to only R&D activities conducted in Australia. To be eligible for the R&D Tax Incentive the activities must be classified as either core R&D activities or supporting R&D activities.  In brief, core R&D activities are essentially the experimental undertakings conducted to generate new knowledge (The R&D Tax Incentive: Glossary of Frequently Used Terms).  It is vital to note that activities must show that they are undertaken for the dominant purpose of supporting R&D activities or generating new knowledge, rather than a commercial or other purpose.

To make the process easier, we’ve put together an infographic which indicates the activities that do not qualify for the R&D Tax Incentive. You can download the PDF to print or save here: Examples of Non Core R&D Activities. In a previous blog post, we delved into what is considered ineligible expenses and expenditure.

As noted above, the deadline for lodging an application for registration is ten months after the end of a company’s income year. Thus, for companies with a standard income period of 1 July to 30 June, the lodgement date for registrations with AusIndustry is April 30.

Further information about the R&D Tax Incentive is available on the ATO website. If you have any questions about the incentive in relation to your company, please contact one our R&D tax specialists at Swanson Reed. You can also find out whether your company qualifies for the R&D Tax Incentive by completing our quick, online R&D eligibility quiz.