Clawback of R&D tax incentive offset and catch-up deductions

What is a catch-up deduction?

You can claim a catch-up deduction if you have a deductible balancing adjustment for an R&D asset in a year. The catch-up deduction provides an additional deduction for the incentive component of the R&D tax incentive.

What is a clawback adjustment?

An amount of the R&D tax incentive offset you have claimed in any year is clawed back in the current year if one or more of the following clawback events happens during the year:

• You have received, or are entitled to receive, a recoupment amount from an Australian Government agency, or a state or territory body source for expenditure for which you had previously received an offset.
• You have a feedstock adjustment for tangible products.
• You have an assessable balancing adjustment for an R&D asset.

The clawback includes an additional amount in your assessable income.

Clawback doesn't decrease the grant or offset you receive. Instead, it increases your assessable income. This is called a 'clawback adjustment'.

Recoupment amounts

A clawback adjustment arises in a year you, or an entity connected or affiliated with you, either receives or is entitled to receive a recoupment from an Australian Government agency, or a state or territory body. Examples of recoupment include:

• reimbursements relating to expenditure already incurred on certain activities
• grants provided to you which require expenditure to be (or have been) incurred on certain activities.

You must be eligible for the R&D tax incentive in relation to either the:

• expenditure
• decline in value of notional deductions, where the expenditure was for a depreciating asset used in those activities.

The clawback is worked out on the amount of the R&D expenditure recouped. See Clawback of recoupment (government grants and reimbursements) for more information.

Where you receive recoupments (including grants) for R&D expenditure for which you claimed the R&D tax incentive, the recoupment amounts must be included in your total assessable income.

Feedstock adjustments

A feedstock adjustment arises when both of the following occur:

• You received an R&D tax offset for your feedstock expenditure incurred on R&D activities.
• During an income year those activities produce products that you, or an entity connected or affiliated with you, supply to someone else or apply to your own use.

The feedstock adjustment applies to either:

• expenditure on goods or materials (feedstock inputs) that are transformed or processed during R&D activities in producing one or more tangible products (feedstock outputs)
• expenditure on energy that is input directly into that transformation or processing
• the decline in value of assets used in acquiring or producing the feedstock inputs.

Where a feedstock adjustment is triggered, you must include an amount in your assessable income. This may be in the current or in a future income year, depending on when the output is sold or applied.

See Clawback of feedstock adjustments for more information.

Balancing adjustments for R&D assets

A balancing adjustment happens when you stop holding a depreciating asset. A common example is when you sell the asset. The clawback is worked out on the termination value of the R&D asset at that time which exceeds its adjustable value (previously known as tax-written down value). The amount is capped to ensure the clawback does not apply to the extent that the asset has appreciated in value. If the asset was partially held for R&D purposes, the clawback amount is reduced in proportion to the non-R&D use of the asset.

A separate catch-up deduction arises instead if the adjustable value exceeds the termination value of the asset at the time of the balancing adjustment event. If you have a deductible balancing adjustment for an R&D asset, you can claim a catch-up deduction that mirrors the clawback for an assessable balancing adjustment. This provides a deduction in lieu of the amount of R&D tax offset which is forgone on the asset when the balancing adjustment event happens. The R&D tax offset is not available for a catch-up deduction balancing adjustment.

See Balancing adjustments for R&D assets for more information.

Calculating the clawback amount

A clawback amount is included in your assessable income. The amount matches the incentive or premium component of the R&D tax incentive offset that relates to the clawback event.

Use the following steps to work out the clawback amount:

1. Start with each amount that is being clawed back in the current year.
2. Separate each amount into the notional deduction that is being clawed back for each claim year.
3. Add up the amounts being clawed back for each claim year.
4. Multiply the total amount being clawed back for each claim year by your corporate tax rate for that year. This is called your deduction amount.
5. Work out for each claim year the difference between your original R&D tax offset, and what your R&D tax offset would have been if notional deductions had been reduced by the total amount being clawed back for that year. This is called your offset differential.
6. Add up all your deduction amounts and add up all your offset differentials.
7. Subtract your total deduction amounts from your total offset differentials. This is the premium or incentive component of your R&D tax offset above your corporate tax rate for the amounts being clawed back.
8. Gross up the premium or incentive component to an equivalent amount of assessable income by dividing the amount by your corporate tax rate for the current year. This is the amount to be included in your assessable income.