The meaning of '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 (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.
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 8-1External Link 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
- 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
- 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.