Before you can claim a notional deduction under the R&D tax incentive, ensure you:
- are an eligible R&D entity
- have conducted eligible activities
- have registered your activities with the Department of Industry, Science and Resources (DISR) (on behalf of Innovation Industry and Science Australia) for the year
- meet requirements about who R&D activities can be conducted for (usually R&D activities should be conducted for you and you should receive the major benefit from your registered activities)
- have adequate records to demonstrate to us and the DISR that you carried out eligible R&D activities and incurred eligible R&D expenditure on those activities
- have received an advance overseas finding from DISR for any expenditure you intend to claim on R&D activities conducted overseas.
Expenditure must be incurred before it may be claimed as a notional R&D deduction.
You can also visit business.gov.auExternal Link for further information about:
- the eligibility of your activities
- registration of your R&D activities
- advance findings.
How to calculate
After determining your eligibility for the R&D tax incentive, you will need to calculate the total amount of your notional R&D deductions to determine the offset you can claim. To help work out your claim amount using your notional deductions see Steps for claiming the R&D tax incentive.
For income years commencing on or after 1 July 2021, the rate of the tax offset is reduced to the company tax rate for the portion of an entity’s notional R&D deductions that exceeds $150 million.
General deduction not available
Where an amount is a notional deduction, you can't deduct it as a general deduction, for example, under section 8-1 of the ITAA 1997. This is because it is a step in working out the amount of the tax offset you may be entitled to, rather than a deduction amount.
How notional deductions apply
An R&D entity is entitled to a notional deduction for:
- expenditure incurred on R&D activities during the income year
- the decline in value of depreciating assets used for R&D activities during the income year.
Balancing adjustments are claimed as an actual deduction. They aren't claimed as a notional deduction in working out the entity's R&D tax offset.
Although amounts treated as notional deductions are not actually deducted in calculating your taxable income, they are treated as a deduction when applying:
- a provision that prevents some or all of an amount being deducted
- a provision that changes the income year in which an amount can be deducted
- a provision that includes an amount in assessable income because an amount has been deducted
- other provisions that refer to an entitlement to a tax offset under the R&D provisions.
We have examples of each of these limiting provisions.
We may be required to hold an opinion, form a judgment or make a determination if the notional deduction is an actual deduction.
Limiting provisions
Examples of a provision that prevents some or all of an amount being deducted are:
- Division 26 of the ITAA 1997, which is about amounts you can't deduct, or can't deduct in full
- Division 27 of the ITAA 1997, which is about the effect of input tax credits on deductions
- the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936).
An example of a provision that changes the income year in which an amount can be deducted is the prepayment rules in Subdivision H of Division 3 of Part III of the ITAA 1936.
Examples of a provision that includes an amount in assessable income because an amount has been deducted are:
- clawback of R&D recoupments, feedstock adjustments and balancing adjustments in Subdivision 355-G of the ITAA 1997
- the rule about recoupment of deductible amounts in Subdivision 20-A of the ITAA 1997
- the cost base rules for capital gains in Part 3-1 and Part 3-3 of the ITAA 1997
- applying the R&D tax incentive provisions to work out your tax offset entitlement.
An example of other provisions that refer to an entitlement to a tax offset under the R&D provisions is the balancing adjustment provisions in section 40-292 and section 40-293 of the ITAA 1997.