• R&D Refundable and non-refundable tax offsets

    The rate of the R&D tax offset and whether it is refundable or not depends primarily on the R&D entity's aggregated turnover.

    If your aggregated turnover is less than $20 million and you are not controlled by any exempt entities, then you can claim the 43.5% refundable tax offset.

    If your aggregated turnover is $20 million or more, or you are controlled by exempt entities, then you can claim the non-refundable 38.5% tax offset.

    The rate of the R&D tax offset is reduced to the company tax rate for that portion of an entity’s notional R&D deductions that exceed $100 million for an income year (applicable to income years starting on or after 1 July 2014 and before 1 July 2024).

    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.

    See also:

    Annual turnover

    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.

    Example

    In the year ending 30 June 2017, 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

    $15.5 million

    Company B's annual turnover

    $6.7 million

    Total

    $22.2 million

    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%.

    End of example

    R&D refundable tax offset

    The normal income tax rules for refundable tax offsets apply, including 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?

    Generally, a franking debit arises in your entity's franking account when it receives a refund of income tax which includes a refunded amount from a tax offset.

    However, special rules ensure that the amount of R&D tax offset refunded is not immediately reduced as a result of the entity becoming liable to franking deficit tax. The franking debit that usually arises when a refund of income tax is received is effectively deferred in relation to refundable tax offset amounts.

    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.

    See also:

    R&D non-refundable tax offset

    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.

    More information

    For information on registration, eligibility of R&D activities and findings, contact AusIndustry

    • Visit the ‘Contact Us’ page on the business.gov.au website for details on how to contact AusIndustry via phone (13 28 46), email or web chat.

    For information on eligible entities and amounts you can claim, contact the ATO

      Last modified: 28 Feb 2017QC 24620