R&D Tax Incentive – A Guide To Benefits and Eligibility for Your Business

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What is the Tax R&D Incentive?

The R&D Tax Incentive (also known as the RDTI) is the Australian Federal Government’s flagship innovation program.

The RDTI is designed to encourage businesses to conduct R&D that may otherwise not be undertaken due to uncertain returns. It offers a way for thousands of companies to innovate by offsetting some of the costs of eligible R&D expenditure. The revenue forgone by the Australian Taxation Office (ATO) amounts to billions of dollars every year in tax offsets.

Ready to learn about the R&D Tax Incentive opportunities available to you? Great – we’re here to guide you.

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What benefits does the R&D Tax Incentive program offer?

The RDTI offers a tax offset for eligible R&D expenditure. The offset rate and whether it is refundable or non-refundable depends on whether your business’ aggregated annual turnover is less than or greater than $20 million:

Less than $20M:

Entities with an annual aggregated turnover less than $20M are entitled to a refundable R&D tax offset rate that is your corporate tax rate plus an 18.5% premium.

This means eligible entities undertaking R&D can potentially receive a refund equal to 43.5% of their eligible R&D expenditure:

25% corporate tax rate plus 18.5% premium = 43.5%

More than $20M:

Entities with an annual aggregated turnover of more than $20M are entitled to a non-refundable R&D tax offset. The rate depends on your “R&D intensity”:

R&D expenditure up to 2% R&D intensity: the rate is your corporate tax rate plus an 8.5% premium.
Additional R&D expenditure above 2% R&D intensity: the rate is your corporate tax rate plus an 16.5% premium.

R&D intensity is a percentage of your eligible R&D expenditure as proportion of your total expenditure for the year.

Are you eligible for the R&D Tax Incentive?

Consider these three questions before you progress:

Do you have an eligible entity?
Are you conducting activities that fall within the definitions of eligible R&D?
Have you spent enough money to meet the minimum claim size?

Not sure where you stand? Email our team today to help assess your eligibility: info@noahconnect.com.

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Understanding your eligibility for the R&D Tax Incentive.

1

Eligible R&D entities

Eligible R&D entities include entities incorporated under Australian law such as a Pty Ltd or Ltd.

If you’re incorporated under foreign law, you can still be an eligible entity if certain criteria are met. Your NOAH Connect team can help you assess this.

Individuals, sole traders, partnerships, trusts or tax-exempt entities are not eligible R&D entities and are therefore ineligible to claim the R&D Tax Incentive.

2

Eligible R&D activities

Good news: it’s not necessary to have a white coat and a test tube bubbling away in order to obtain RDTI benefits.

Eligible activities must fall within the definition of either “core” or “supporting” R&D. There must be at least one core R&D that you have conducted or plan to conduct.

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; and
That is conducted for the purpose of acquiring new knowledge

Supporting R&D activities are activities directly related to core R&D activities, and may include activities such as technology research, management of experimentation, construction of prototypes, or trials undertaken to validate the core R&D.

Activities performed in any range of settings from a factory floor or workshop, laboratory, construction site, agritech, IT/start-up environment etc. can legitimately be claimed if they align with these definitions, as well as other eligibility criteria. See our Case studies page for some examples.

3

Eligible R&D expenditure

To claim the R&D tax incentive, you need to spend a minimum of $20,000 in one income year on R&D activities (unless the expenditure is incurred to an RSP or is a monetary contribution to a CRC under the CRC program).

Common expenditure claimed against registered R&D activities includes:

Contract expenditure to a Registered Service Provider
Contract expenditure to other parties
Salary expenditure for employees (the most common category of R&D tax expenditure claim)
Expenditure on overseas activities when there’s an overseas finding in place
R&D expenditure paid to your associate in your claim year
Other R&D expenditure (e.g. administrative costs and overheads incurred as a result of undertaking the R&D activity)

Common FAQs regarding the R&D Tax Incentive.

What records do I need to keep to support an R&D Tax Incentive claim?

To claim an R&D tax offset, companies are expected to maintain a level of record that is beyond “business-as-usual” and clearly R&D in character.

In respect of establishing the connection between R&D expenditure and the activities carried out, it depends on the nature of the expense. To evidence R&D salaries, for example, timesheets are the most accurate method to clearly show time spent against registered R&D activities vs BAU activities.

In the absence of timesheets, summary information may be acceptable where it can be backed up with a range of other types of documentation. Email us to learn more: info@noahconnect.com.

What deadlines do I have to keep in mind?

To secure your entitlement to make an R&D Tax Incentive claim, companies must register eligible R&D activities using the RDTI Customer Portal. This must be done within 10 months of the end of the company’s income year.

If you follow the standard July to June financial year, you have until 30 April the following year to submit the R&D application. Companies who report income tax on a calendar year basis have until the end of October the following year to register eligible R&D activities.

Can I claim overseas activity?

Generally, only R&D activities conducted in Australia will qualify for the R&D Tax Incentive. If certain conditions are met, however, companies can make claims for expenditure incurred on overseas activities where advance approval from the regulator has been obtained.

This concession is given in recognition of the fact that Australia does not always have all the necessary R&D expertise and facilities to meet R&D requirements.

To seek and obtain this advance approval, a company needs to lodge an overseas/advance finding application before the end of the first income year that the overseas activities are to be conducted (e.g. by June 2023 for activities carried out during the July 2022 to June 2023 financial year). The approval of the application is contingent upon the company’s ability to demonstrate that four key criteria have been met. These relate to:

The R&D activity meeting the definition of eligible core or supporting R&D activity
The R&D activity having a “significant link” to one or more core R&D activities conducted in Australia
The R&D activity requires access to a facility, expertise or equipment not available in Australia, or it would contravene a law relating to quarantine, or it requires access to a population (of living things) not available in Australia, or it requires access to a geographical or geological feature not available in Australia
The total R&D costs (actual and reasonably anticipated) to be incurred in all income years do not exceed 50% of the total R&D project cost

Is the R&D Tax Incentive program a government grant?

Most grant programs are competitive, following a merit-based selection process where applications are directly compared to one another to determine which are the most competitive. Businesses compete for the same, limited pool of funding.

The RDTI operates on a self-assessment basis and is an entitlement program. What this means is that companies can assess for themselves whether they are eligible under Div 355 of the ITAA 1997. It works in a similar way to income tax return.

For more information on how the R&D Tax Incentive compares to other government grant programs, you can find our grants page here.

How is the R&D Tax Incentive program administered?

There are two program administrators: AusIndustry administers registration and compliance of R&D activities, while the ATO’s compliance work focuses on the R&D tax offset allowable in respect of the registered R&D activities.

What happens if I miss a claim deadline?

This 10-month deadline can only be extended in situations where an act, omission or event has occurred that was not the company’s fault and was not within the company’s control. The total extension can be granted to a business is capped to three months.

Extensions are not easy to obtain and the reasons as to why an extension of time should be granted need to be compelling with evidence attached. The longer the extension period is sought, the stronger the evidence must be. NOAH has successfully sought extensions on behalf of businesses in circumstances such as major change in management due to M&A, issues with setting up MyGovID and not being able to access the RDTI Customer Portal, directors or immediate family falling ill, and otherwise.

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