Amounts you can claim
Under the research and development (R&D) tax incentive, an amount you can claim is called a 'notional deduction'.
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Amounts incurred on your R&D activities must be claimed under the R&D tax incentive. If an amount meets the eligibility requirements of the R&D tax incentive under Division 355 of the Income Tax Assessment Act 1997 (ITAA 1997), it must be claimed under that division.
If you choose not to claim it under the R&D tax incentive, you cannot claim it elsewhere in your tax return (except in certain circumstances for amounts incurred to an associate).
You can only claim a deduction under section 8-1 (or other provision) of the ITAA 1997 if the expenditure does not meet the eligibility requirements under Division 355. This means that if your R&D activities are registered with AusIndustry, you can only claim your expenditure on those activities under the R&D tax incentive.
For more information refer to section 355-715 of the ITAA 1997.
Calculating your notional deduction
The amount you can claim under the R&D tax incentive is calculated using a notional deduction.
After determining your eligibility for the R&D tax incentive, calculate the total amount of your notional R&D deductions to determine the amount of R&D tax offset you can claim.
To do this, multiply your total notional R&D deduction amount by either 43.5% or 38.5% (depending on which R&D tax offset you are eligible for) and claim this amount as an offset in your company tax return.
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 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.
An R&D entity is entitled to a notional deduction for:
- expenditure on R&D activities during the income year
- the decline in value of depreciating assets used for R&D activities during the income year
- a balancing adjustment for depreciating assets used only for R&D activities
Where an amount is a notional deduction you cannot deduct that amount as a general deduction, for example under section 8-1 of the ITAA 1997, when calculating your taxable income. This is because it is a step in working out the amount of the tax offset the entity may be entitled to, rather than a deduction amount.
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, for example
- Division 26 of the ITAA 1997 about amounts you cannot deduct, or cannot deduct in full
- Division 27 of the ITAA 1997 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)
- a provision that changes the income year in which an amount can be deducted, for example
- a provision that includes an amount in assessable income because an amount has been deducted, for example
- 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
- other provisions that refer to an entitlement to a tax offset under the R&D provisions, for example
Where one of the above provisions allows or requires us to hold an opinion, form a judgment or make a determination, we may do so as if the notional deduction is an actual deduction.
Conditions you must meet before claiming a notional deduction
Before you can claim a notional deduction under the R&D tax incentive, ensure you:
- are an R&D entity
- have conducted eligible R&D activities
- have registered your R&D activities with AusIndustry (on behalf of Innovation Australia)
- receive the major benefit from your registered R&D activities
- have received an advance finding from Innovation Australia for any expenditure you intend to claim on R&D activities conducted overseas.