Research and development tax concession: frequently asked questions
Research and development tax concession: frequently asked questions
We jointly administer the research and development (R&D) tax concession with AusIndustry.
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Removal of the R&D tax concession
When considering how the R&D provisions apply to your circumstances, remember that for income years starting on or after 1 July 2011 you no longer use the R&D tax concession. You need to consider the new R&D tax incentive. The concession and the new incentive apply differently. For further information, including fact sheets and a calculator, refer to Research and development tax incentive - home.
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The aggregate R&D amount threshold
What threshold applies?
To be eligible for the R&D tax offset for income years starting on or after 1 July 2009, the aggregate R&D amount of your company and your company's group members (while they are grouped during that income year) must not exceed $2 million. For earlier income years starting after 30 June 2001 but before 1 July 2009, this threshold was $1 million.
How is this threshold calculated?
The $2 million threshold for the R&D tax offset is calculated according to your aggregate R&D amount for the income year. It also considers the aggregate R&D amount of any companies you are grouped with.
The components of the aggregate R&D amount are defined in subsection 73B(1) of the Income Tax Assessment Act 1936 (ITAA 1936). The amount is also used to work out if you meet the $20,000 eligibility threshold for claiming R&D expenditure (excluding contracted expenditure to a registered research agency) and depreciation at the 125% rate.
If, for an income year starting after 1 July 2009, your company's aggregate R&D amount is greater than $2 million, can you choose the offset by only claiming up to the amount of $2 million?
You cannot access the tax offset if your aggregate R&D amount exceeds $2 million. The R&D expenditure of any grouped companies will contribute to the aggregate and they will also be unable to claim the offset if the aggregate exceeds $2 million.
If your aggregate R&D amount exceeds $2 million in the income year, can you choose not to claim some of that expenditure under the R&D tax concession?
Choosing not to claim an eligible R&D deduction will not reduce your aggregate R&D amount. You will still be required to include the relevant amounts for this unclaimed R&D expenditure when calculating your aggregate R&D amount.
Is interest on funding used to finance your R&D activity expenditure included in your aggregate R&D amount?
You should include this interest expenditure when calculating your aggregate R&D amount, even though it does not attract a 125% deduction. By definition, this interest expenditure will form part of your aggregate R&D amount, even if you claim it as a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).
Does 'clawback' affect your aggregate R&D amount?
If you have received a grant and 'clawback' (section 73C of the ITAA 1936) has reduced your entitlement to the additional 25% deduction on some or all of your expenditure, this will not affect your aggregate R&D amount.
The various expenditures on a project must still be included when calculating your aggregate R&D amount, even if:
- you choose not to register a particular project because you received a grant
- after the clawback, there is no remaining entitlement to the additional 25% deduction.
When are you required to lodge your R&D schedule?
The R&D schedule must be lodged at the same time as your company's income tax return, or the relevant amendment request, in which the R&D tax concession claim is made. All R&D tax concession claims, including amendments, must be accompanied by a Research and development tax concession schedule (R&D schedule).
All paper R&D schedules, including the excel version (available from the Research and development tax concession homepage) must be lodged with the appropriate company return for the relevant income year. R&D schedules should be sent to:
Can you lodge through the electronic lodgement system (ELS)?
Selected software packages now facilitate ELS lodgement of the R&D schedule with the company tax return. Check if your software provider has this facility and ensure you access the latest release of their software package. If ELS lodgement of the R&D schedule is not available, an automated Excel version of the R&D schedule can be downloaded from the Research and development tax concession homepage.
However, for the 2002 income year, the R&D schedule cannot be submitted via ELS. Instead, it must be lodged on paper to:
Can you lodge your amendment request electronically?
You cannot lodge your amendment request electronically. All R&D amendment requests, including amended R&D schedules, must be sent to:
What are the basic eligibility requirements for the R&D tax concession?
All of the following criteria must be satisfied for you to meet the basic eligibility requirements:
- You must be a company (you cannot claim the concession if you are undertaking the R&D as a company in the capacity of trustee of a trust other than a public trading trust (for more information, refer to subsection 73B(3) of the ITAA 1936)).
- Generally, you must have spent more than $20,000 on eligible R&D expenditure in the relevant income year (there are some exceptions to this rule, including where R&D was undertaken by a registered research agency on your behalf).
- Your activities must be eligible R&D activities (that is, the activities must meet the definition of R&D activities (for the Australian owned R&D tax concession) or Australian-centred R&D activities (for the foreign owned R&D tax concession) as defined in section 73B of the ITAA 1936.
- The expenditure must qualify for an R&D deduction or R&D tax offset under the relevant provisions of the ITAA 1936.
- The activities must be undertaken on your behalf and not on behalf of another person. This requirement does not apply to prevent a claim made under
- subsection 73B(14C) of the ITAA 1936 for expenditure on foreign owned R&D
- section 73QB of the ITAA 1936 for the 175% international premium
- which may be available for activities performed wholly or primarily on behalf of a grouped foreign company.
- You must be registered with Innovation Australia for each income year you want to claim the concession.
How long will it take to get your tax offset refund?
We work to turnaround your refund in 14 days for electronically lodged company returns and six weeks for paper returns. Schedules and returns that contain errors or require amendment will delay the process.
Do companies need to register before claiming a deduction under the R&D tax concession?
The legislation requires companies to register before lodging their tax return. Companies must therefore register before claiming a deduction under the R&D tax concession. The practice in the past has been to undertake data matching after the 10-month registration period. This practice will continue.
Are the expenses you incur for your registered R&D activities automatically deductible?
Registering your activities with Innovation Australia does not mean that either the activities or the expenses incurred for those activities are automatically eligible for the tax concession.
The tax system is based on self-assessment. This means you must satisfy yourself that both of the following apply to the expenditure:
- it was incurred on eligible R&D activities
- it qualifies for deduction under the relevant provisions of the ITAA 1936.
Will we review your claim for the R&D tax concession?
The tax system is based on self-assessment. We conduct point of lodgement and risk reviews to ensure companies are eligible for the tax concessions claimed and that they are only claiming eligible expenditures for their R&D activities. If we find any errors, we may issue an amended assessment adjusting income, deductions or tax offsets on your tax return. You are then obliged to repay any tax owing, together with interest and/or penalties as prescribed by law.
To help companies work out their eligibility to claim the tax concession, we have issued guidance material, including the Guide to the research and development tax concession.
Claims for the tax concession are formally reviewed through the selection of companies for risk assessment, audit or other types of review.
What figure should you show at item 7, label D - Reconciliation to taxable income or loss, on the company tax return?
If you have included your R&D expenditure in the calculation of the total profit or loss at item 6 on your company tax return, you need to add the expenditure back at item 7 label D if you are claiming the R&D tax concession.
This expenditure is included at item 7:
- label L - Australian owned R&D tax concession (not including label M)
- label J - Foreign owned R&D tax concession (not including label K)
- label M - Australian owned R&D - extra incremental 50% deduction
- label K - Foreign owned R&D - extra incremental 75% deduction.
If you have capitalised your R&D expenditure in your accounts, and therefore it has not been included in item 6 - Calculation of total profit or loss, then you do not need to add it back at item 7 label D.
R&D refunds and franking debits
Does a refund of a R&D tax offset generate a franking debit?
A refund of a R&D tax offset does not generate a franking debit (for more information, refer to ATO Interpretative Decisions 2004/345 and 2004/346).
Subsection 4-10(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a tax offset reduces the amount of income tax you have to pay. Where a tax offset is refundable; that is, where it is subject to the refundable tax offset rules, if the amount of the offset exceeds the amount of tax that the company would otherwise have had to pay, then the excess is refundable.
The R&D tax offset is not a refund of income tax because it does not represent a return to the company of an amount paid or applied to satisfy its liability to pay income tax. There is no amount that has been returned to the company because the research and development tax offset arises from the operation of the tax law, and not from a payment made by the company in satisfaction of an income tax liability. Therefore it will not give rise to a franking debit under item 2 of the table in section 205-30 of the ITAA 1997.
Is the R&D tax offset refund assessable income?
The R&D tax offset refund is not assessable income. The amount of the refund represents the current tax benefit of the R&D tax deduction and does not have the character of income. The refundable tax offset is not assessable income because it is neither 'ordinary' nor 'statutory' income for the purposes of section 6-15 of the ITAA 1997.
How will claiming the R&D tax offset affect your tax liability?
The R&D tax offset is a refundable tax offset, equivalent to the value of the R&D tax concession. If a company makes the choice for the refundable tax offset, there is no entitlement to R&D deductions in that income year.
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An eligible company cannot choose the R&D tax offset instead of a deduction for foreign owned R&D under subsection 73B(14C) of the ITAA 1936 or the 175% international premium under section 73QB of the ITAA 1936.
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The offset is paid at the rate of 30 cents for each dollar of certain deductions that would have otherwise been claimable. Where expenditure is eligible for 125% deduction, this is equivalent to a benefit of 37.5 cents per dollar of eligible R&D expenditure, and 52.5 cents per dollar of any expenditure eligible for the 175% Australian premium.
The offset directly reduces tax payable by a company. This includes income taxes, GST, FBT and withholding taxes. Where the amount of the offset exceeds the amount of tax that the company would otherwise have had to pay, then the excess is refundable.
Example
The following table sets out the tax position of two companies if they choose the R&D tax offset. Each company is assumed to be in tax loss, and has eligible R&D expenses of $100,000, none of which has been capitalised in the companies' accounts. Neither company is eligible to claim expenditure on foreign owned R&D, the 175% Australian premium or the 175% international premium in this particular income year:
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Company A
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Company B
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125% tax concession
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R&D
tax offset
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125% tax concession
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R&D
tax offset
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Step 1 Work out taxable income for the income year
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Total profit or loss
(Item 6 - Label T)
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($50,000)
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($50,000)
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($100,000)
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($100,000)
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Add
Accounting expenditure in item 6 subject to R&D tax concession
(Item 7 - Label D)
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$100,000
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$100,000
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$100,000
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$100,000
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Less Australian owned R&D tax concession not including Label M) (Item 7 - Label L)
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($125,000)
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($125,000)
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($125,000)
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($125,000)
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Add R&D offset if chosen - R&D claim added back (Item 7 - Label Y)
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Not Applicable
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$125,000
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Not Applicable
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$125,000
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Taxable Income or loss
(Item 7 - Label T)
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($75,000)
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$50,000
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($125,000)
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Nil
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Step 2 Work out basic income tax liability
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Tax payable on taxable income
(30% corporate tax rate)
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Nil
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$15,000
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Nil
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Nil
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Step 3 Work out tax offsets for the income year
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R&D Tax Offset
(Calculation Statement - Label U)
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Not Applicable
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$37,500
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Not Applicable
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$37,500
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Step 4 Income Tax liability for year
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Tax refund due
Assumes no other tax liabilities
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Nil
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$22,500
cash refund
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Nil
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$37,500 cash refund
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The R&D tax offset and prior year losses
What effect does the use of prior year losses have if I choose to take the R&D tax offset?
For some taxpayers, the use of prior year losses will have the effect of reducing taxable income and income tax payable. This is still the case where a choice is made for the R&D tax offset. Therefore, the use of prior year losses can increase the amount of the R&D tax offset which is refundable, but not beyond 30 cents for each dollar of R&D deduction that can be converted to the R&D tax offset.
Example
The following table sets out the tax position of Company A and the impact of choosing the R&D tax offset where prior year losses of $50,000 are available to be utilised. The first column shows an example where Company A has prior years tax losses of $50,000 to be utilised, the second column shows an example if the company has no prior year losses to be utilised. Company A has a profit of $50,000 at item 6 label T of the company tax return. Company A has eligible R&D expenses of $100,000, all of which have been capitalised in the company's accounts. Company A is not eligible to claim expenditure on foreign owned R&D, the 175% Australian premium or the 175% international premium in this particular income year:
Company A
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Prior year losses used
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No prior year losses available
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Step 1 Work out taxable income for the income year
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Total profit or loss (Item 6 - Label T)
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$50,000
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$50,000
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Add
Accounting expenditure in item 6 subject to R&D tax concession
(Item 7 - Label D)
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0
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0
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Less Australian owned R&D tax concession not including Label M
(Item 7 - Label L)
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($125,000)
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($125,000)
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Less Tax losses deducted (Item 7 - Label R)
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($50,000)
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Not applicable
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Add R&D offset if chosen - R&D claim added back (Item 7 - Label Y)
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$125,000
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$125,000
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Taxable income or loss
(Item 7 - Label T)
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Nil Taxable Income
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$50,000
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Step 2 Work out basic income tax liability
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Tax payable on taxable income
(30% corporate tax rate)
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Nil
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$15,000
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Step 3 Work out tax offsets for the income year
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R&D tax offset (Calculation Statement - Label U)
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$37,500
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$37,500
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Step 4 Income tax liability for year
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Tax refund due Assumes no other tax liabilities
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$37,500
cash refund
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$22,500
cash refund
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For more information:
Last Modified: Monday, 20 August 2012
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