Research and development tax incentive – refundable and non-refundable tax offsets
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The research and development (R&D) tax incentive provides a targeted tax offset to encourage certain companies (R&D entities) to conduct R&D activities that benefit Australia.
It provides generous benefits for companies performing eligible R&D activities and has the following two core components:
- a 43.5% refundable tax offset for eligible entities with an aggregated turnover of less than $20 million - unless they are controlled by tax exempt entities
- a % non-refundable tax offset for all other eligible entities.
The rate of the R&D tax offset is reduced to the company tax rate (currently 30%) for that portion of an entity’s notional R&D deductions that exceeds $100 million for an income year. This change applies to assessments for income years starting on or after 1 July 2014 and before 1 July 2024.
The tax incentive replaces the R&D tax concession and is jointly administered by Innovation Australia (assisted by AusIndustry) and us.
The R&D tax incentive started on 1 July 2011. It provides eligible R&D entities with a tax offset broadly for:
- expenditure on eligible R&D activities
- the decline in value of depreciating assets used for eligible R&D activities.
Both the rate of the tax offset and whether it is refundable depend primarily on the R&D entity's aggregated turnover.
What is aggregated turnover?
Aggregated turnover is the sum of the annual turnover for all of the following:
- the R&D entity
- any entity connected with the R&D entity
- any entity affiliated with the R&D entity.
Any dealings between these entities are excluded.
Your entity's annual turnover is the total ordinary income your entity derived in the income year in the ordinary course of carrying on its business activities. This amount does not include GST.
If an R&D entity is not carrying on a business at any time during the income year, its annual turnover is nil. If your entity carries on business for part of the income year, its annual turnover for that year must be worked out using a reasonable estimate of what its annual turnover would be if it carried on a business for the whole income year.
In the year ending 30 June 2012, Company A does all of the following:
- carries on a business
- undertakes R&D activities
- incurs expenditure on its R&D activities and meets all eligibility requirements for the R&D tax incentive
- has an annual turnover of $15.5 million.
In the same income year, Company A is connected with Company B and no other entity for the full income year. Company A has no affiliates. Company B is not an exempt entity and has both of the following:
- an annual turnover of $6.7 million
- $2.7 million of ordinary income related to dealings with Company A.
To work out whether it is entitled to a refundable or non-refundable tax offset, Company A first adds the following:
Company A's annual turnover
Company B's annual turnover
It then subtracts the dealings between Company A and Company B:
$22.2 million - $2.7 million = $19.5 million
This means Company A's aggregated turnover is $19.5 million.
As Company A's aggregated turnover is less than $20 million and as it has met all the other eligibility criteria, it is entitled to a refundable R&D tax offset at the rate of 43.5%.
Can companies that have tax exempt shareholders claim the R&D tax incentive?
Regardless of an R&D entity's aggregated turnover, if one or more exempt entities control an R&D entity (with a relevant control threshold of 50%), then it is only eligible for the 48.5% non-refundable tax offset.
How does the R&D refundable tax offset affect tax liabilities?
If the offset is a refundable tax offset, the normal income tax rules for refundable tax offsets apply. These include the priority rules about how tax offsets must be applied against the basic income tax your entity is liable to pay. A refundable tax offset is applied after all other tax offsets, except tax offsets that arise from paying franking deficit tax.
If there is an excess of tax offsets, your entity may be entitled to a refund, subject to the rules on how we must apply credits, including refunds, to running balance accounts or against a particular tax debt.
Does the R&D refundable tax offset generate a franking debit?
The R&D refundable tax offset generates a franking debit that is effectively deferred. Generally, a franking debit arises in your entity's franking account when it receives a refund of income tax which includes an amount of a tax offset refunded to it.
However, so the franking debit triggered by the receipt of the refundable R&D tax offset, does not effectively clawback the offset's benefit, the franking debit is effectively deferred.
Where a debit has been deferred for this reason, a franking credit will not arise as a result of income tax or PAYG instalments your entity pays until it recovers these deferred franking debits.
How does the R&D non-refundable tax offset affect tax liabilities?
If the offset is a non-refundable tax offset, it is applied before refundable tax offsets and tax offsets that arise from paying franking deficit tax but after all other tax offsets, such as a foreign income tax offset. An R&D entity can carry forward a non-refundable tax offset to a later year if it satisfies the standard tax offset carry-forward rules.
For more information about the eligibility of R&D activities, contact AusIndustry by:
For more information about eligible entities and amounts you can claim:
Information about how to work out which tax offset you may be entitled to under the research and development tax incentive.