R&D Tax Incentive Law

R&D tax incentive rates

The R&D tax incentive encourages companies to engage in R&D benefiting Australia, by providing a tax offset for eligible R&D activities. It has two elements, noting that these rates will apply from 1 July 2021 with higher benefits as follows: 

Turnover <$20 million (Refundable RDTI Offset) 

Offset Rate 43.5% 

Company Tax Rate 25%

Net Benefit 18.5% 

For smaller companies eligible for the refundable RDTI tax offset, the rate will be fixed at the taxpayer’s tax rate plus 18.5%. This equates to a total offset rate of 43.5%, with a permanent tax benefit of 18.5%. This can still be ‘cashed out’ to the extent that the entity is in a tax loss position. 

Turnover >$20 million (Non-Refundable RDTI Offset) 

Companies with turnover > $20 million will receive a non-refundable benefit based on “R&D intensity” (that is, R&D spend as a proportion of total spend/expenses) with two tiers, per below. This demonstrates a significant commitment by the government to larger companies that increase their R&D intensity, by providing a net benefit of 16.5% (almost double the current base rate). 

Tier 1- Notional deductions up to 2% of total expenses = 8.5% benefit above the company tax rate 

Tier 2- Notional deductions above 2% of total expenses = 16.5% above the company tax rate.

For further detailed information in addition to the extracts below, refer ATO R&D site: 

https://www.ato.gov.au/Business/Research-and-development-tax-incentive/About-the-program/; 

and Department of Industry, Innovation and Science (DIIS) site:  

Department of Industry, Innovation and Science's websiteExternal Link.

AusIndustry lodgement portal:

Additional company identification details, including the requirement for a company to have a MyGovID account

Content about R&D activities and expenditure, including:

• Specific queries around future core activities and the relationship between supporting and core activities;
• Disclosure of expenditure per activity;
• Disclosure about how a company researched the state of knowledge prior to an activity commencing to ensure that the outcome could not be determined in advance;
• Details of evidence kept to substantiate activities;
• Disclosure of whether supporting activities produce a good or service;

The following is an extract from the AusIndustry website:

The R&D Tax Incentive has an updated application process. You're now able to draft your application using our R&D Tax Incentive customer portal. The new portal provides you:

• improved security
• ability to view the status of your application in real time
• indicators of approaching deadlines.

There are also new questions, that make it clear on how you address eligibility criteria in your application.

https://business.gov.au/grants-and-programs/research-and-development-tax-incentive/customer-portal-help-and-support

Core R&D activities

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 that  
  • is based on principles of established science; and
  • proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions
• that are conducted for the purpose of generating new knowledge (including about creating new knowledge or improved materials, products, devices, processes or services).

Some types of activities are specifically excluded from being core R&D activities.

Supporting R&D activities

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. Activities that must satisfy the dominant purpose requirement are those that produce - or are directly related to producing - goods or services; or are excluded from being core R&D activities.

For more detailed information about core R&D activities and supporting R&D activities, refer to the Department of Industry, Innovation and ScienceExternal Link.

Where you conduct your R&D activities

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. 

For whom are the activities conducted?

Working out for whom the R&D activities are conducted involves determining who receives the major benefit from carrying out the activities (for example, who owns the results of the activities).  If you fail this test, it's possible you cannot claim the R&D tax incentive.

Registration

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 DIIS (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.

More information about registering, including requesting an advance finding, and the special arrangements for registering R&D activities performed by members of consolidated groups, can be found on the Department of Industry, Innovation and Science websiteExternal Link.

Eligible Entities

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 a 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.