Eligible entities
Broadly speaking, your eligibility to claim tax offsets under the research and development (R&D) tax incentive will depend on whether you:
- are an R&D entity
- incurred notional deductions of at least $20,000 on eligible R&D activities.
R&D entity
You are an R&D entity if you are a corporation that is either incorporated under:
- an Australian law
- a foreign law but you are an Australian resident for income tax purposes
- a foreign law and you are both
- a resident of a country with which Australia has a double tax agreementExternal Link that includes a definition of 'permanent establishment'
- carrying on business in Australia through a permanent establishment as defined in the relevant double tax agreement.
You are not eligible for an R&D tax offset if you are either:
- an individual
- a corporate limited partnership
- an exempt entity (where your entire income is exempt from income tax).
Trusts are not generally R&D entities, except a body corporate in the capacity of trustee for a public trading trust.
If you are an R&D entity, you may also need to consider the special rules applied to consolidated groups and R&D partnerships.
For the definition of:
- 'R&D entity', refer to section 355-35 of the Income Tax Assessment Act 1997 (ITAA 1997)
- 'Australian law', 'foreign law' and 'Australian resident', refer to section 995-1 of the ITAA 1997.
For more information, se:
- Taxation Ruling TR 2018/5 Income tax: central management and control test of residency
- Permanent establishments.
Consolidated groups
If you are the head company of a consolidated group or MEC group, your subsidiary members are treated as part of you (the head company) for as long as they remain part of the consolidated or MEC group for income tax purposes.
Therefore, the R&D tax incentive applies to your consolidated group or MEC group as if it is a single entity conducting all R&D activities within the group. This means only the head company of the group should register for, and claim, the tax incentive for these R&D activities. See Consolidated group or a multiple entry consolidated (MEC) group for more information.
R&D partnerships
An R&D partnership is one where each partner meets the definition of an R&D entity. The partnership itself is not eligible to claim the R&D tax incentive for the R&D activities it undertakes because it is not an R&D entity. However, the partners may be able to claim for R&D activities the partnership has undertaken. For more information, see the special rules that apply if you are a partner in an R&D partnership.
Who R&D activities are conducted for
In most cases, you can only claim the R&D tax incentive for expenditure on R&D activities conducted for you (and not to a significant extent for some other entity. See Who R&D activities are conducted for for more information.
Eligible activities
Your eligibility to claim the R&D tax incentive will also depend on:
- where you are conducting your R&D activities
- what those activities are.
R&D activities must meet certain criteria to be eligible for the R&D tax incentive. They must be classified as either core R&D activities or supporting R&D activities.
Core R&D activities
Core R&D activitiesExternal Link are experimental activities:
- whose outcome can't be known or determined in advance on the basis of current knowledge, information or experience
- which can only be determined by applying a systematic progression of work that
- is based on principles of established science
- proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions
- that are conducted for the purpose of generating new knowledge (including about creating new knowledge or improved materials, products, devices, processes or services).
Some types of activities are specifically excluded from being core R&D activities. See the List of excluded activitiesExternal Link.
Supporting R&D activities
A supporting R&D activityExternal Link is one that is directly related to core R&D activities or, for certain activities, has been undertaken for the dominant purpose of supporting core R&D activities.
Activities that must satisfy the dominant purpose requirement are those that either:
- produce – or are directly related to producing – goods or services
- are excluded from being core R&D activities.
Where you are conducting your R&D activities
Generally, only R&D activities conducted in Australia qualify for the R&D tax incentive. However, R&D activities conducted overseas also qualify if the Department of Industry, Science and Resources (DISR) makes a finding that your activities meet the conditions specified in section 28D of the Industry Research and Development Act 1986 (IR&D Act).
If parts of an R&D activity conducted for you are in Australia or an Australian external territory and parts are overseas, you must have a relevant finding from DISR for the parts conducted overseas.
You can't claim R&D activities conducted overseas in either of the following circumstances:
- the activities are conducted for an associated foreign corporation
- you are a foreign corporation carrying on your business through a permanent establishment in Australia and the R&D activities are conducted for you and not for the permanent establishment.
Example: Overseas R&D activities conducted for an R&D entity
Under the terms of an agreement, Company U – a company incorporated in the United States of America (USA) – agrees to conduct R&D activities solely in the USA for Company A, an Australian company. Company A and Company U are not connected or affiliated with each other. The agreement specifies that Company A will benefit from all of the intellectual property obtained from the activities and will control how the activities are conducted.
Before the agreement begins, Company A obtains a favourable finding from DISR that those R&D activities could not be conducted in Australia, under paragraph 28C(1)(a) of the Industry Research and Development Act 1986.
As Company A will benefit from all of the intellectual property obtained from the activities, and controls the conduct of those R&D activities, the activities are being conducted solely for Company A. Therefore, if Company A meets the other eligibility criteria, they will be able to claim a notional deduction under the R&D tax incentive because the:
- R&D activities are conducted for Company A
- the company also has an overseas finding for the overseas R&D activities.
Eligible notional deductions
You may be entitled to an R&D tax offset if your total notional deductions for an income year are at least $20,000. Eligible notional deductions are also used to calculate your R&D tax offset.
If your total notional deductions are less than $20,000, you will only be able to obtain the tax offset for:
- contracted expenditure incurred to a Research Service Provider (RSP) for services within a research field for which the RSP is registered under the IR&D Act. The RSP can't be an associate of the R&D entity.
- expenditure incurred as a monetary contribution under the Co-operative Research Centre (CRC) program.
- Before making a claim for the R&D tax incentive, you need to determine whether your expenditure is eligible or ineligible under the R&D incentive.
Eligible expenditure
If you are an R&D entity, the notional deduction amounts you can claim may be for:
- expenditure incurred on R&D activities, including
- expenditure incurred on overseas activities covered by an Advance FindingExternal Link from DISR
- amounts paid to associates and expenditure incurred to an RSP
- the decline in value of assets used for conducting R&D activities (including R&D partnership assets)
- expenditure incurred in relation to goods and materials transformed or processed during R&D activities to produce marketable products (feedstock expenditure)
- monetary contributions under the CRC program.
You are entitled to a notional R&D deduction in relation to expenditure described above to the extent that:
- your expenditure is of a kind eligible for the R&D tax incentive
- you incur expenditure during the income year on one or more registered R&D activities. This does not include amounts you incur to an associate but do not pay until a later income year.
As a result, the general rule is that expenditure on R&D activities is claimable in the income year it is incurred. The exceptions to this rule are when:
- an amount of expenditure is incurred but not paid to an associate
- the prepayment rules apply in relation to expenditure for services to be provided over a period.
Eligible expenditure on your R&D activities must be claimed under the R&D tax incentive. If you choose not to claim eligible expenditure under the R&D tax incentive, you can't claim it elsewhere in your tax return. This is different to the former R&D tax concession, where you could choose to claim an amount under another deduction provision.
For more information about notional deductions and the requirements you must meet, see amounts you can claim.
Ineligible expenditure
You can't notionally deduct expenditure under the R&D tax incentive that is:
- interest expenditure (within the meaning of interest in the withholding tax rules)
- expenditure that is not at risk. Taxation Ruling TR 2021/5 Income tax: research and development tax offsets – the ‘at risk’ rule sets out the provisions that prevent an entity from notionally deducting expenditure that is not 'at risk'.
- core technology expenditure
- expenditure included in the cost of a depreciating asset. Decline in value notional deductions may apply however.
- expenditure incurred to acquire or construct a building, or part of a building or an extension, alteration or improvement to a building.
These types of expenditure do not warrant the enhanced tax benefits available under the R&D tax incentive. However, they should be considered under the normal deduction provisions of the income tax law because you may still be able to deduct these amounts from your assessable income.
For more information, see Expenditure you can't claim.