The R&D Tax Incentive, explained

Who can claim

The incentive is available to R&D entities: companies incorporated in Australia, foreign companies that are Australian residents for tax purposes, and certain foreign companies carrying on business through a permanent establishment in Australia. Trusts are generally excluded, with the exception of public trading trusts, and individuals and partnerships cannot claim directly.

The company must have conducted eligible R&D activities, registered them with AusIndustry, and incurred notional deductions of at least $20,000 in the income year. Work carried out through a registered Research Service Provider or a Cooperative Research Centre is exempt from the $20,000 threshold.

What qualifies as R&D

Division 355 of the Income Tax Assessment Act 1997 defines two kinds of activity. A core R&D activity is an experimental activity whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, and which is conducted through a systematic progression of work: hypothesis, experiment, observation and evaluation, leading to logical conclusions, for the purpose of generating new knowledge. A supporting R&D activity is one directly related to a core activity, or, for certain activities, one undertaken for the dominant purpose of supporting core activities.

Several activities are excluded from being core activities even where they are experimental in nature. The list includes market research and sales promotion, prospecting and exploring for minerals, management studies and efficiency surveys, research in the social sciences, arts or humanities, commercial or legal activities such as patenting and licensing, complying with statutory requirements, reproducing a commercial product from a physical example or published plans, and developing, modifying or customising computer software for the dominant purpose of the company's internal administration. Software businesses in particular need to show that the uncertainty was technical and the work was experimental, not routine development.

What the offset is worth

The offset rate is tied to the company's tax rate and its aggregated turnover. Companies with aggregated turnover under $20 million receive a refundable tax offset equal to their company tax rate plus 18.5 percentage points. For a base rate entity taxed at 25 percent that is 43.5 percent of eligible expenditure, and for a company taxed at 30 percent it is 48.5 percent, paid as a refund where it exceeds tax payable.

Companies with aggregated turnover of $20 million or more receive a non-refundable offset. The premium above the company tax rate depends on R&D intensity, which is R&D expenditure as a proportion of total expenses for the year: 8.5 percentage points on expenditure up to 2 percent intensity and 16.5 percentage points on the portion above 2 percent. At the 30 percent tax rate that is 38.5 percent and 46.5 percent respectively. A non-refundable offset reduces tax payable and any unused amount is carried forward.

Notional deductions above $150 million in an income year attract an offset at the company tax rate only. Expenditure claimed under the incentive cannot also be deducted in the ordinary way, and the clawback and feedstock rules can reduce the benefit where R&D produces saleable output or attracts a government grant.

The timeline

Activities must be registered with AusIndustry within 10 months after the end of the income year in which they were conducted. For a 30 June year end that is 30 April of the following year. Registration is for the activities, not the expenditure, and is made each year. The offset is then claimed through the R&D Tax Incentive schedule lodged with the company tax return. Advance and overseas findings can be sought from AusIndustry where a company wants certainty before it proceeds, and overseas activities need a finding before their expenditure can be claimed.

What a claim has to prove

Both AusIndustry and the ATO can review a claim after it is lodged, and the burden of proof sits with the company. A claim needs records made at the time the work was done, showing the hypothesis being tested, the experiments run and their results, the people involved and the time they spent, and the basis on which each item of expenditure was apportioned to a registered activity. Under section 262A of the Income Tax Assessment Act 1936, records must generally be kept for five years from when they were prepared or obtained, or from when the transactions they relate to were completed, whichever is later.

• Project plans, technical specifications and design documents that set out the technical uncertainty and the hypothesis.
• Experiment logs, test results, prototypes and version histories that show the systematic progression of work.
• Timesheets or other contemporaneous records of who worked on each activity and for how long.
• Invoices, contracts and ledger extracts for contractor and direct costs, with the apportionment method recorded.
• Board papers, meeting notes and correspondence that show the purpose of the work was generating new knowledge.

Where Elderon fits

Elderon takes a company and its adviser through these requirements in order. It scopes each activity against the statutory tests, sorts the ledger into R&D categories with uncertain lines held for review, calculates the offset for the entity's turnover and intensity, and assembles the evidence pack with each finding citing the section of Division 355 it relies on. The adviser reviews the pack and lodges the claim. Elderon does not lodge claims and its AI output is not tax advice.