The Research and Development Tax Incentives (R&D Tax Incentive) are government programs designed to encourage companies to invest in research and development activities and can be a great source of non-dilutive capital for businesses. Companies that qualify for the incentive and have an aggregated turnover of less than $20 million may be entitled to a 43.5% tax offset of eligible R&D expenditure. The offset is claimed through the company tax return and is refundable, so businesses that are not in a tax-paying position can receive the tax offset as a cash refund, effectively subsidising almost half of their R&D spend.
For businesses with a turnover of at least $20 million, the tax offset becomes non-refundable and is between 33.5% and 46.5%, depending on the company’s corporate tax rate and the proportion of its R&D expenditures to total business expenditure.
Research and Development
For the purposes of the incentive, ‘research and development’ requires the company to conduct at least one ‘core R&D activity’ during the income year, which has three key components:
- New knowledge: the activity is carried out to generate new knowledge in the form of new or improved materials, products, devices, processes, or services.
- Technical uncertainty: the outcome of the activity cannot be known or determined in advance based on current knowledge, information, or expertise.
- Experimentation: this activity is experimental in nature and involves a systematic progression of work based on the principles of established science, which proceeds from hypothesis to experiments, observations, evaluations, and logical conclusions.
Where a core R&D activity has been conducted during the income year, any ‘supporting R&D activities’ may also be eligible for the incentive. Supporting R&D activities are those activities conducted for the purpose of supporting the core R&D activity (but do not form a part of the experimentation) and can include preliminary research, project management, and data collection.
Eligibility
In addition to conducting at least one core R&D activity during the income year, businesses intending to claim the incentive must also satisfy the following eligibility criteria:
- The applicant is an Australian tax resident company
- The R&D activities are conducted in Australia
- The company incurs at least $20,000 of eligible R&D expenditure during the income year
Eligible expenditure
If a business is conducting at least one core R&D activity during the year and satisfies the above eligibility criteria, then the next step is to calculate the expenditure attributable to the core and supporting R&D activities conducted.
Eligible R&D expenditure may include:
- Expenditure to research service provider (RSP)
- Salary and wages, Superannuation, workers compensation and payroll tax
- Contractor expenses
- Depreciation of plant and equipment used for R&D activities
- Overhead expenses including rent, electricity, telephone, and cleaning
Industries
Based on the R&D tax incentive transparency report, the Top 5 industries that claimed R&D expenditure are:
- professional, scientific, and technical services
- manufacturing
- wholesale trade
- Information media and telecommunications
- Financial and insurance services
Accordingly, businesses in the above industries that are not currently claiming the R&D Tax Incentive should consider whether they may be eligible to do so.
If you would like to know more about the R&D Tax Incentive, please feel free to contact our office.
