Research and development tax incentive – for whom are R&D activities conducted?
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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 eligible R&D activities and has the following 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 38.5% 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.
Entitlement to either offset is based on an eligible company having incurred expenditure on R&D activities that it can notionally deduct. Generally, expenditure on R&D activities conducted to a significant extent for another entity will not be notionally deductible. There are some exceptions to this where the R&D activities are conducted for associated foreign corporations.
The requirement that a company's eligible expenditure be on R&D activities conducted for it and not - to a significant extent - for some other entity, is intended to limit claims to cases where the company receives the major benefit from its expenditure on those activities. In some cases it will also prevent duplication of claims by different entities where essentially the same R&D activities are involved.
Working out whether your company receives the major benefit from the R&D activities involves working out the extent to which it conducted those activities for itself rather than for another entity. You can assess this by considering who:
- 'effectively owns' the know-how, intellectual property or other similar results arising from your company's expenditure on the R&D activities
- has appropriate control over the way the R&D activities are conducted
- bears the financial burden of carrying out the R&D activities.
Whether an R&D activity is conducted for your company is a matter of fact. It is determined by whether the activity is conducted, in substance, to provide the majority of knowledge benefits resulting from the activity – such as access to intellectual property – to your company.