The Research and development (R&D) tax incentive encourages companies to engage in R&D benefiting Australia, by providing a tax offset for eligible R&D activities.
About the Program
The incentive has two core components. Entities engaged in R&D may be eligible for:
- a 43.5% refundable tax offset for eligible entities with an aggregated turnover of less than $20 million per annum, provided they are not controlled by income tax-exempt entities
- a 38.5% non-refundable tax offset for all other eligible entities (entities may be able to carry forward unused offset amounts to future income years).
The rate of the R&D tax offset is reduced to the company tax rate for that portion of an entity’s notional R&D deductions that exceed $100 million for an income year. This change applies to assessments for income years starting on or after 1 July 2014 and before 1 July 2024.
Your eligibility to claim R&D tax offsets will depend on whether or not you are an R&D entity and, if you are, whether or not you have incurred notional deductions of at least $20,000 on eligible R&D activities.
You can only claim an R&D tax offset if you are an R&D entity. You are an R&D entity if you are a corporation that is any of the following:
- incorporated under an Australian law
- incorporated under a foreign law but an Australian resident for income tax purposes
- incorporated under foreign law and you are both
- a resident of a country with which Australia has a double tax agreement that includes a definition of ‘permanent establishment’; and
- carrying on business in Australia through a permanent establishment as defined in the double tax agreement.
Entities not Eligible
You are not eligible for an R&D tax offset if you are:
- an individual
- a corporate limited partnership
- an exempt entity (where your entire income is exempt from income tax)
- a trust (with the exception of a public trading trust with a corporate trustee).
Your eligibility to claim the R&D tax offset will also depend on where you are conducting your R&D activities and, importantly, what those activities are.
Generally, only R&D activities conducted in Australia qualify for the R&D tax incentive. However, R&D activities conducted overseas also qualify if Innovation and Science Australia makes a finding that your activities meet the conditions specified in section 28D of the Industry Research and Development Act 1986.
Core R&D activities are experimental activities whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work.
A supporting activity is one that is directly related to core R&D activities or, for certain activities, has been undertaken for the dominant purpose of supporting core R&D activities.
If your company is an R&D entity and you want to claim an R&D tax offset in your company’s income tax return, you must first register your R&D activities with the Department of Industry, Innovation, and Science (who act on behalf of Innovation and Science Australia). You must register your R&D activities:
- for every income year you want to claim the offset
- within 10 months of the end of your company’s income year
- prior to claiming the R&D tax offset in your company income tax return.