• Research and development tax incentive - clawback adjustment

    Introduction

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    The research and development (R&D) tax incentive provides two targeted tax offsets to encourage qualifying R&D entities to conduct R&D activities that benefit Australia. It replaced the R&D tax concession and is jointly administered by Innovation Australia (assisted by AusIndustry) and the ATO.

    If you have received a recoupment from government (such as a grant or reimbursement) that relates to R&D expenditure for which you have received an R&D tax incentive tax offset, you need to make a clawback adjustment.

    The clawback adjustment does not decrease the grant or offset you receive; rather it increases the income tax you are liable to pay on the recoupment.

    This guide explains:

    Attention

    When we say you in this guide we are referring to a company that meets the definition of an R&D entity. For more information about R&D entities, refer to Research and development tax incentive - who can claim

    End of attention

    Determine if a clawback adjustment is required

    A clawback adjustment under subdivision 355-G of the Income Tax Assessment Act 1997 (ITAA 1997) arises if, during an income year, you either receive or are entitled to receive a recoupment from an Australian government agency, or a state or territory body, (other than under the CRC program) and all of the following apply:

    • The recoupment (such as a reimbursement) relates to expenditure incurred on certain activities or the recoupment (such as a grant) requires expenditure to either be or have been incurred on certain activities.
    • You have claimed the R&D tax incentive in relation to the expenditure (or decline in value notional deductions where the expenditure was for a depreciating asset used in those activities).

    To work out if you need to make a clawback adjustment, you must work through these 3 steps:

    • Step 1 - have you received or are you entitled to receive a recoupment during the income year?
    • Step 2 - is the recoupment from an Australian government agency or a state or territory body?
    • Step 3 - have you or a related entity, claimed the R&D tax incentive tax offset for expenditure that relates to the recoupment?

    If you answer yes to steps 1, 2 and 3, you will need to make a clawback adjustment. If you have answered no to any of these questions, you will not need to make a clawback adjustment at this point in time.

    However, if you have answered yes to steps 1 and 2, you may need to make a clawback adjustment in the future if you later satisfy step 3.

    Step 1

    You may be required to make a clawback adjustment if in an income year you receive or are entitled to receive a recoupment that is either a:

    If you do not satisfy this requirement, you do not need to make a clawback adjustment and do not need to work through steps 2 and 3.

    Recoupment

    A recoupment as referred to in subdivision 355-G of the ITAA 1997 is defined in section 20-25 of the ITAA 1997. There are two broad categories of recoupment as defined:

    Find out more
    For the definition of recoupment, refer to section 20-25 of the ITAA 1997External Link.

    End of find out more
    Recoupment of expenditure incurred

    If you have received or are entitled to receive a recoupment of all or some of the expenditure that you have already incurred on your R&D activities you may need to make a clawback adjustment. A recoupment of this type, which could include reimbursement, refund or recovery of expenditure, will typically be retrospective, as it is paid to you after expenditure has been incurred.

    This type of recoupment restores you to the position you would be in if you had not incurred that expenditure (to which the recoupment relates). As a result, you have not experienced any financial detriment in relation to the expenditure to the extent that it has been recouped.

    Example: Recoupment that reimburses R&D expenditure

    Company C conducts R&D activities for which Company C receives the R&D tax offset in the income year ending 30 June 2012. In the income year ending 30 June 2013, Company C receives a $500,000 reimbursement under a government scheme for specified costs that it incurred in the prior year, of which $400,000 was for expenditures notionally deducted under the R&D tax incentive. Company C has received a recoupment of expenditure it has incurred on certain activities (including R&D activities that qualify for the R&D tax incentive).

    End of example
    Recoupment that requires expenditure to be incurred or to have been incurred

    The second type of recoupment is where the recoupment you receive or are entitled to receive is a recoupment that requires a specified amount (the project expenditure) to be incurred or to have been incurred on certain activities (which include R&D activities). This form of a recoupment is often referred to as a grant.

    A grant provides funding for specific purposes. Often, a grant is conditional on you spending a specified amount (project expenditure) on certain activities. The grant may be for an amount that is equal to, greater than or less than the project expenditure. A grant can be made in an income year before, at the same time or after related expenditure has been incurred.

    A grant is in respect of your expenditure if there is a sufficient nexus between the expenditure and the grant. A material reason for the payment of the grant must be the expenditure.

    Example: Recoupment that is a grant

    Company D applies for and receives $1 million from an Australian government entity on the condition that it will spend at least $2 million on a range of specific activities. Those specific activities include some eligible R&D activities. Company D undertakes those activities, incurs the required $2 million expenditure and receives the R&D tax offset in relation to the expenditure on the R&D activities. Company D would have received $1 million regardless of the actual amount incurred by Company D provided it met the $2 million threshold. The recoupment company D receives is a grant.

    End of example

    Receive or entitled to receive

    You receive a recoupment when it is actually paid to you.

    You are entitled to receive a recoupment when you are unconditionally entitled to that recoupment.

    If you have applied for a government grant and have been notified that your application for funding has been approved this does not necessarily mean that you are entitled to receive the grant at that point. Grant programs are often paid in instalments. Each instalment may be contingent or conditional on certain events or milestones occurring which may include expenditure being incurred or proposed to be incurred within a certain timeframe.

    You are entitled to receive a grant instalment when you have met all the conditions that must be satisfied for the instalment to be made, to the satisfaction of the entity paying the grant. You are not entitled to receive a grant instalment if you have not met all conditions that need to be met before the instalment can be paid.

    Even if the grant is subject to a repayment obligation that may arise in the future, that alone does not affect your entitlement to the grant and it would still be considered for clawback purposes.

    Example: An R&D entity is entitled to receive grant instalments

    In the income year 30 June 2012, Company A has applied for and received approval for an Australian Government agency grant for certain R&D expenditure it proposes to incur. The grant is to be paid on a quarterly basis during the income years ending 30 June 2013 and 30 June 2014. Each quarterly payment of the grant ($25,000) is conditional on Company A meeting certain conditions and milestones and notifying the Australian Government agency that they have been met. The grant instalment is to be paid to Company A within 30 days of the company notifying the Australian Government agency that it is has met the relevant conditions and milestones.

    Although Company A has received approval for the $200,000 grant, Company A has not received and is not entitled to receive the grant in the income year ending 30 June 2012. In the income year ending 30 June 2013, Company A met and notified the Australian Government agency that all conditions and milestones had been met before the end of each quarter. The Australian Government agency paid Company A the following instalments:

    Notification to agency Instalment paid Amount

    30 September 2012

    21 October 2012

    $25,000

    23 December 2012

    20 January 2013

    $25,000

    26 March 2013

    6 April 2013

    $25,000

    25 June 2013

    20 July 2013

    $25,000

    In the income year ending 30 June 2013, Company A received the first three instalments of $25,000 listed in the table above (totalling $75,000). In addition, while the final instalment was not paid until the following income year, as Company A had notified the Australian Government agency that the conditions for payment had been met on 25 June 2013 it was entitled to receive the final $25,000 instalment for the 2013 income year.

    As at 30 June 2013, Company A was not entitled to receive any further grant instalments (that is, the remaining $100,000) that they may receive in the income year ending 30 June 2014. This is because at 30 June 2013 they have not met the conditions relating to the remaining grant instalments.

    End of example

    Step 2

    You only need to make a clawback adjustment if the recoupment is from either:

    A variety of Australian Government assistance programs provide support for R&D entities undertaking R&D activities. Even if an assistance program does not necessarily specify that an objective of the funding is to support R&D activities, a clawback adjustment may still be required.

    Many of these programs will also support activities other than R&D activities. A clawback adjustment will not be required to the extent that the funding is received for activities that are not R&D activities.

    If you have received a recoupment but it is not from an Australian government agency or an STB, you do not need to make a clawback adjustment and you do not need to work through step 3.

    Australian government agency

    Where we say 'an Australian government agency' we mean any of the following:

    • the Australian Government
    • a state or a territory
    • an authority of the Australian Government
    • an authority of a state or a territory.

    AusIndustry, as a division of the Department of Industry is one such government agency that has a range of programs designed to support innovation within Australian industry. These programs may support R&D activities through:

    • grants for expenditure that qualify for the R&D tax incentive
    • other forms of support that result in a recoupment of expenditure that qualifies for the R&D tax incentive tax offset.

    If you have received funding from an AusIndustry program that supports R&D activities as outlined above, you may need to make a clawback adjustment.

    Attention

    You do not need to make a clawback adjustment for recoupments received under the Cooperative Research Centres Program.

    End of attention

    Find out more
    For information about the funding programs provided by the Department of Industry, visit their programs page at their website ausindustry.gov.au/programsExternal Link

    End of find out more

    State or territory body (STB)

    Division 1AB of the Income Tax Assessment Act 1936 (ITAA 1936) sets out the ways that a body can be an STB.

    A body is an STB if it is a company limited solely by shares and all the shares are owned by one or more government entities.

    A body that is not a company can also be an STB if it is established by State or Territory legislation and it meets certain other requirements about the distribution of profits and assets only to one or more government entities or if one or more government entities has certain powers regarding the management of the body.

    A body that is not a company and is not established by State or Territory legislation can also be an STB if it meets certain requirements about ownership held by one or more government entities and if one or more government entities has certain powers regarding voting and the management of the body.

    Find out more
    For the definition of government entity, refer to section 24ATExternal Link and section 24AUExternal Link of the ITAA 1936.
    For more information about the five different ways that a body can be an STB, refer to:

    For more information about step 2, refer to:

    End of find out more

    Example: Government funding program

    Company B incurs R&D expenditure and other expenditure under a project it carries out in the income year ending 30 June 2013. Company B receives a partial reimbursement for their expenditure from a funding program of the Department of Industry. As the Department of Industry is an Australian Government agency, step 2 is satisfied and Company B may need to make a clawback adjustment.

    End of example

    Step 3

    You need to make a clawback adjustment if all or some of the expenditure for which you have received the recoupment is also expenditure that has been taken into account in working out your R&D tax incentive tax offset in one or more income years.

    You also need to make a clawback adjustment if you have received or become entitled to receive a recoupment for expenditure that has been taken into account in working out R&D tax incentive tax offsets obtained by certain related entities in one or more income years.

    Expenditure is taken into account in working out an R&D tax incentive tax offset if you or certain related entities can notionally deduct this expenditure under Division 355 of the ITAA 1997 (notional deductions). These notional deductions may be available for the expenditure itself or for the decline in value for R&D assets (if the expenditure incurred was to acquire R&D assets). The notional deductions that may be taken into account working out your R&D tax incentive tax offset are:

    • R&D expenditure (including expenditure to a registered service provider) in the current year
    • Decline in value of R&D assets (including R&D partnership assets) where expenditure is for the acquisition of an R&D asset
    • R&D expenditure associated with the recoupment incurred an earlier year
    • CRC contributions.
    Attention

    If the relevant requirements are met and your notional deductions are less than $20,000, the notional deductions you can take into account when working out your R&D tax incentive tax offset are limited to:
    - notional deductions for expenditure incurred to a research service provider and
    - notional deductions for CRC contributions.

    End of attention

    Find out more
    For more information about notional deductions that can be claimed under the R&D tax incentive as a tax offset, or the meaning of 'notional deduction' refer to R&D tax incentive - amounts you can claim.

    End of find out more
    Attention

    In some cases, if you receive or are entitled to receive a recoupment, section 355-405 of the ITAA 1997External Link may apply to prevent deductions from being claimed for R&D expenditure or earlier year associate R&D expenditure. If you are unable to claim the R&D tax incentive for any expenditure related to the recoupment because section 355-405 of the ITAA 1997 applies (the expenditure is not at risk), you do not meet the requirements of step 3 and do not need to make a clawback adjustment.

    In other cases when you receive or are entitled to receive a recoupment, section 355-405 may not apply to prevent deductions from being claimed for R&D expenditure or earlier year associate R&D expenditure. In these circumstances, you may still need to make a clawback adjustment if you meet the relevant requirements.

    End of attention

    If you do not meet the requirements of step 3 you do not need to make a clawback adjustment at present. However, if you have answered yes to steps 1 and 2, you may need to make a clawback adjustment in the future if you later satisfy the requirements of step 3. For example, you may not be entitled to claim the R&D tax incentive tax offset for expenditure in the current year, but you may be able to claim the R&D tax offset in the following income year. If this occurs, you will need to make a clawback adjustment when you also satisfy the requirements of step 3, which will require you to amend your company tax return for the previous income year.

    Example: R&D tax offset claimed for expenditure partially reimbursed

    Company D incurs R&D expenditure under a project it carries out in the income year ending 30 June 2012. In this income year, the company is entitled to notional deductions for this R&D expenditure, which are taken into account in working out the R&D tax incentive tax offset claimed by the company in that income year. The company receives a partial reimbursement for this expenditure from an Australian government agency funding program in the following income year. Company D will need to make a clawback adjustment because the company has received a partial recoupment of expenditure incurred from an Australian government agency, for expenditure for which the R&D tax incentive tax offset is claimed.

    End of example

    Related entities

    When working out if the need for a clawback adjustment will arise, you also need to consider whether you have received or are entitled to receive any government recoupments in relation to expenditure that has been taken into account in working out the research and development tax offset for:

    An R&D entity includes a company. An individual, partnership or trust cannot be an R&D entity and therefore cannot claim the R&D tax incentive (with the exception of a corporate trustee of a public trading trust).

    Find out more
    For more information on R&D entities, refer to Research and development tax incentive - Who can claim.

    End of find out more
    Connected with you

    You are connected with another entity if any of the following applies:

    • you control the other entity
    • the other entity controls you
    • you and the other entity are controlled by the same third entity.

    You control a company if you, your affiliates, or you together with your affiliates, have either:

    • shares and other equity interests in the company that give you and/or your affiliates at least 40% of the voting power in the company
    • the right to receive at least 40% of any income or capital the company distributes.

    You also control a company if you, your affiliates, or you together with your affiliates have the right to acquire shares or other equity that interests in the company that give you and/or your affiliates either:

    • shares and other equity interests in the company that give you and/or your affiliates at least 40% of the voting power in the company
    • the right to receive at least 40% of any income or capital the company distributes.

    Find out more
    For further information about the meaning of the phrase 'connected with an entity', refer to What are the aggregation rules?


    Research and development tax incentive - grouping for aggregate turnover purposes also contains further information and an example of where you and another entity could be controlled by the same third entity.

    End of find out more
    An affiliate of you

    A company is your affiliate if, in relation to the affairs of its business, it acts, or could reasonably be expected to act, in either of the following ways:

    • in accordance with your directions or wishes
    • in concert with you.

    A company is not your affiliate merely because of the nature of the business relationship you and the company share.

    Further information

    Find out more
    For more information, refer to Affiliates.
    For more information about step 3, refer to section 355-450 of the ITAA 1997External Link.

    End of further information

    Timing of the clawback adjustment

    To work out in which income year you need to make a clawback adjustment to pay extra income tax on your recoupment, you must identify the ‘trigger year’.

    Attention

    The trigger year is the year that you receive the recoupment that relates to R&D activities or the year that you are entitled to receive that recoupment if this occurs in an earlier income year.

    End of attention

    Often, you will be entitled to receive a recoupment in the same income year that it is received. However, it is possible that you may be entitled to receive a recoupment in an income year earlier than the income year that you actually receive the recoupment. If this occurs, the year that you are entitled to receive the recoupment is the trigger year.

    If your recoupment is paid in instalments over more than one income year you may have more than one trigger year. You are required to make a clawback adjustment for each trigger year.

    The extra income tax on the recoupment is payable in the trigger year, regardless of whether you claim the R&D tax offset in the same, an earlier or later income year. As a result, you may need to amend your past income tax assessments in some circumstances to make the clawback adjustment.

    For more information about when you receive a recoupment or are entitled to receive a recoupment, see Receive or entitled to receive.

    Example: more than one trigger year

    Company E is a successful applicant for an Australian Government agency grant. The grant is paid in two instalments, in advance of and for specified expenses being incurred by the company, provided certain milestones have been met by the payment date of the instalment. Company E receives the following grant instalments from the Australian Government agency upon completion of the relevant milestones:

    Instalment date Instalment amount

    1 June 2013 received during the income year ending 30 June 2013

    $50,000

    1 January 2014 received during the income year ending 30 June 2014

    $80,000

    The relevant specified expenses, which were eligible R&D expenses, were incurred and claimed by Company E under the R&D tax incentive in the income year ending 30 June 2014.

    As Company E receives recoupments in two income years, the income years ending 30 June 2013 and 30 June 2014, Company E has two trigger years.

    However, at 30 June 2013, Company E has not claimed the R&D tax incentive for expenditure related to the grant instalment received on 1 June 2013. Therefore Company E will lodge its 2013 company tax return in July 2013 without a clawback adjustment being made for that income year.

    When Company E lodges its 2014 company tax return, it claims the R&D tax incentive for the relevant expenditure that relates to both instalments of the grant. Company E also makes a clawback adjustment for the recoupment received on 1 January 2014. Company E also lodges an amendment to its 2013 company tax return to make a clawback adjustment for the recoupment received in the income year ending 30 June 2013.

    End of example

    Clawback adjustment

    Once you have determined that clawback applies and the timing of the clawback adjustment, you will next need to calculate the amount of your clawback adjustment.

    The clawback adjustment is an amount of extra income tax at the rate of 10% of the amount of expenditure which relates to the recoupment for which you have received the R&D tax incentive. To work out your clawback adjustment, you first need to identify your 'R&D expenditure' (that is relevant to the recoupment), as the extra income tax of 10% is imposed on this amount.

    The first step to identifying your 'R&D expenditure' is to work out whether your recoupment is a:

    You would have considered what type of recoupment you have when determining whether a clawback adjustment is required under step 1.

    Find out more
    For more information about working out whether you have a recoupment of expenditure incurred on certain activities (including R&D activities) or a recoupment that requires expenditure to have been incurred or to be incurred on certain activities (including R&D activities), refer to step 1.

    End of find out more

    Recoupment of expenditure incurred

    A recoupment of this type could include reimbursement, refund or recovery of expenditure incurred.

    If you have received a recoupment of expenditure incurred on certain activities (including R&D activities), your R&D expenditure that is relevant to your clawback adjustment is the expenditure that has been recouped to the extent that both the following apply:

    • You have claimed
      • a notional deduction for that expenditure under Division 355 of the ITAA 1997, and/or
      • the notional decline in value (if the expenditure relating to the recoupment was for an R&D asset) under Division 355 of the ITAA 1997.
       
    • The notional deductions and/or notional decline in value have been taken into account in working out the R&D tax incentive tax offset obtained for one or more income years.

    If only some of your expenditure has been recouped, for example you have only been partially reimbursed for R&D expenditure you have incurred, then your R&D expenditure that you use when calculating your clawback adjustment is limited to the amount of expenditure that has been recouped or reimbursed, rather than the total R&D expenditure.

    Example: Identifying R&D expenditure used to calculate a clawback adjustment - reimbursement

    Company Q carries out an R&D project in the income year ending 30 June 2012. In this income year, Company Q incurs expenditure of $120,000 that qualifies for a notional deduction under Division 355 of the ITAA 1997 and is also claimed as an R&D tax offset. The company also applies for funding from an Australian Government agency for expenditure it has incurred. As a result, the Australian Government agency reimburses the company for half of its expenditure incurred ($60,000) in the same income year. The R&D expenditure that Company Q uses when calculating its clawback adjustment is $60,000. Company Q's clawback adjustment in the income year ending 30 June 2012 is:

    R&D expenditure ($60,000) x 10% = $6,000

    End of example

    Recoupment that requires expenditure to be incurred

    This form of a recoupment is often referred to as a grant that provides funding for specific purposes. If your recoupment requires expenditure to be incurred on certain activities (including R&D activities), your R&D expenditure for these purposes is the expenditure that is required to be incurred to the extent that both the following apply:

    • You have claimed
      • a notional deduction for that expenditure under Division 355 of the ITAA 1997, and/or
      • the notional decline in value (if the expenditure relating to the recoupment was for an R&D asset) under Division 355 of the ITAA 1997
       
    • The notional deductions and/or notional decline in value have been taken into account in working out your R&D tax incentive tax offset for one or more income years.

    Example: Identifying R&D expenditure used to calculate a clawback adjustment - grant

    Company V receives a grant from an Australian government agency of $230,000 for its R&D project it carries out in the income year ending 30 June 2013. The Australian government agency requires that Company V carries out certain specified activities in the relevant income year and Company V is also required to spend at least $360,000 on the R&D project in the relevant income year. Company V spends $360,000 (including grant funding) on the project that qualifies for a notional deduction under Division 355 of the ITAA 1997. The company also claims an R&D tax offset for this expenditure in the income year ending 30 June 2013. The R&D expenditure that Company V uses when calculating its clawback adjustment is $360,000. Company V's clawback adjustment in the income year ending 30 June 2013 (before calculating the cap for grants) is:

    R&D expenditure ($360,000) x 10% = $36,000

    End of example

    In this example, the cap for grants does not affect the calculation of the clawback adjustment.

    If you have a grant that is paid in two instalments over more than one income year (or trigger year), you will need to identify the R&D expenditure for each income year to calculate your clawback adjustment. In this circumstance, you do not include R&D expenditure that you have already taken into account to work out your earlier clawback adjustment in the following year. The example below shows how R&D expenditure is identified in these circumstances.

    Example: Working out R&D expenditure for multiple years

    Company Y receives a grant from an Australian Government agency for $200,000 for certain specified R&D activities. Under the agreement the Australian Government agency agreed to pay $200,000 over two years to Company Y. Company Y is required under the agreement to spend $400,000 (including the grant funding) over these two years. In the income year ending 30 June 2013, Company Y receives its first instalment of the grant ($150,000), which relates to expenditure required to be incurred on the R&D project in the income year ending 30 June 2013 ($300,000). This expenditure qualifies for a notional deduction under Division 355 of the ITAA 1997 and is also claimed as an R&D tax offset in the same income year.

    On 30 June 2014, Company Y receives its second and final instalment of the grant ($50,000), which relates to expenditure required to be incurred on the R&D project in the income year ending 30 June 2014 ($100,000). This expenditure qualifies for a notional deduction under Division 355 of the ITAA 1997 and is also claimed as an R&D tax offset in the same income year.

    Entitlement to each grant instalment did not arise before it was paid to Company Y.

    The R&D expenditure that Company Y uses when calculating is clawback adjustment in the income year ending 30 June 2013 is $300,000. Company Y's clawback adjustment in that year (before calculating the cap for grants) is:

    R&D expenditure ($300,000) x 10% = $30,000

    End of example

    In this example, the cap for grants does not affect the calculation of the clawback adjustment.

    The R&D expenditure that Company Y uses when calculating is clawback adjustment in the income year ending 30 June 2014 is $100,000. Company Y's clawback adjustment in that year (before calculating the cap for grants) is:

    R&D expenditure ($100,000) x 10% = $10,000

    In this example, the cap for grants does not affect the calculation of the clawback adjustment.

    If you have received or are entitled to receive a recoupment in relation to expenditure that has been taken into account in working out the research and development tax offset for certain related entities, this will affect your clawback adjustment.

    For more information including an example, see Related entities.

    Cap for grants

    If you have received a recoupment that is a grant then a cap applies to the amount of the extra income tax. This cap applies to ensure the amount of extra income tax you pay on your grant cannot exceed the amount of the grant that, on a pro-rata basis, is deemed to relate to the R&D expenditure. This is done by using the following formula to determine the maximum amount of the extra income tax:

    Net amount of the recoupment x R&D expenditure/Project expenditure

    The Net amount of the recoupment means the total amount of the recoupment, less any repayments of the recoupment during an income year.

    Project expenditure is expenditure that the recoupment requires to be / to have been incurred on certain activities. You need to refer to your grant agreement to work out what your project expenditure is in respect of each recoupment received. A recoupment may be an instalment under the agreement.

    For information about identifying your R&D expenditure, see Clawback adjustment.

    This cap ensures that, in relation to your R&D activities, you will receive the R&D incentive, rather than the grant, where the R&D tax incentive is worth more than the grant.

    If you have received a recoupment that is a reimbursement, no cap applies. This is because logically, your clawback adjustment on the reimbursement cannot exceed 10% of the reimbursement because the recoupment will always equal the expenditure being reimbursed.

    Examples

    The following examples show how you work out the clawback adjustment in different scenarios.

    Example: Recoupment that reimburses R&D and other expenditure

    In the income year ending 30 June 2012, Company E conducts R&D activities for which they receive the R&D tax offset. Company E receives a $500,000 reimbursement under an Australian government agency scheme for specified costs that it incurred, of which $400,000 was eligible for R&D expenditure notionally deducted under the R&D tax incentive and for which they received an R&D tax offset in the relevant income year. Company E's clawback adjustment (extra income tax) for the income year ending 30 June 2012 is:

    R&D expenditure ($400,000) x 10% = $40,000

    End of example

    Example: Recoupment that partially reimburses R&D expenditure

    Company F conducts R&D activities on which it incurred $1,000,000 R&D expenditure and for which it receives an R&D tax offset in the year ended 30 June 2013. In the income year ending 30 June 2014 Company F receives a $500,000 reimbursement from an Australian government agency for half of the R&D expenditures it incurred in the previous income year.

    Company F's clawback adjustment (extra income tax) for the income year ending 30 June 2014 is:

    R&D expenditure ($500,000) x 10% = $50,000

    End of example

    Example: Grant wholly relates to R&D expenditure

    Company D receives a $1 million Australian government agency grant in relation to eligible R&D activities that it conducts in the income year ending 30 June 2013. The grant agreement requires Company D to spend a total of $2 million (including the grant money) on specified R&D activities, which it does during the income year the grant was received. Company D also claims the R&D tax incentive tax offset for the $2 million of expenditure in that income year. Company D determines that a clawback adjustment is required and works out its clawback adjustment for the income year ending 30 June 2013 as:

    R&D expenditure ($2,000,000) x 10% = $200,000

    End of example

    In this example, the cap does not limit the clawback adjustment.

    The extra income tax Company D will need to pay in the income year ending 30 June 2013 is therefore $200,000.

    Example: Grant for R&D expenditure and other expenditure

    Company Q receives a $90,000 grant in relation to certain activities that it conducts in the income year ending 30 June 2012. The grant agreement between Company Q and an Australian government agency specifies that Company Q is required to spend $1 million (including grant funding) on a particular project, which it does in the same income year. Of this amount, $100,000 is required to be spent on R&D activities that relate to expenditure for which that Company Q claims the R&D tax incentive tax offset. The remaining $900,000 that Company Q is required to spend relates to other activities that do not qualify for the R&D tax incentive.

    The total project expenditure is $1 million, but only $100,000 of this expenditure was claimed under the R&D tax incentive. Company D determines that a clawback adjustment is required and works out its clawback adjustment for the income year ending 30 June 2012 as:

    The clawback adjustment (before working out the cap) is:

    R&D expenditure ($100,000) x 10% = $10,000

    Calculation of the cap, limits the clawback adjustment:

    Net amount of the recoupment x R&D expenditure/Project expenditure

    $90,000 x 100,000/1,000,000

    = $9,000

    Therefore, the clawback adjustment is limited to the cap of $9,000. The amount of the clawback adjustment is the extra income tax Company Q will need to pay in the relevant income year.

    End of example

    Example: Grant for R&D expenditure and other expenditure

    In the income year ending 30 June 2013, Company P receives approval for a $100,000 grant from an Australian government agency, which is paid later in that income year. The grant is paid for specified activities including R&D activities that Company P carries out in the relevant income year.

    The grant agreement requires that Company P spend at least $2 million on the specified activities. Half of this required expenditure on the activities specified in the agreement relates to R&D activities on which Company P claims the R&D tax incentive.

    Company P spends $3 million on the project (including $1,500,000 on the R&D activities in which it is entitled to claim the R&D tax incentive in the relevant income year). Company P determines that clawback applies and calculates its clawback adjustment:

    Clawback adjustment (before the calculation of the clawback cap):

    R&D expenditure ($1,000,000) x 10% = $100,000

    Calculation of the cap:

    Net amount of the recoupment x R&D expenditure/Project expenditure

    $100,000 x 1,000,000/2,000,000

    = $50,000.

    End of example

    In this example, the cap limits the clawback adjustment to $50,000. The amount of the clawback adjustment is the extra income tax Company P will need to pay in the income year ending 30 June 2013.

    Example: Grant paid for multiple years

    In the income year ending 30 June 2012, Company Z has applied for and received approval for an Australian government agency grant for certain specified R&D activities. Under the agreement the Australian Government agency agreed to pay $110,000 over the following two years to Company Z. Company Z is required under the agreement to spend $220,000 (including the grant funding) over these two years. If Company Z fails to spend the total amount required to be spent under the agreement with the Australian government agency by the end of the grant program, Company Z will need to repay an amount to the Australian government agency.

    On 30 June 2013, Company Z receives its first instalment of the grant ($50,000), which relates to expenditure required to have been incurred on the R&D activities in the income year ending 30 June 2013.

    On 30 June 2014, Company Z receives its second and final instalment of the grant ($60,000), which relates to expenditure required to have been incurred on the R&D activities in the income year ending 30 June 2014.

    Entitlement to each grant instalment did not arise before it was paid to Company Z.

    The following table outlines expenditure that Company Z is required to incur in the relevant income years by the Australian Government agency (expenditure required to be incurred) and the actual expenditure Company Z incurred in the relevant income years (expenditure actually incurred).

    Expenditure Income year ending 30 June 2012 Income year ending 30 June 2013 Income year ending 30 June 2014

    Expenditure required to be incurred – claimed under the R&D tax incentive

    0

    $100,000

    $120,000

    Expenditure actually incurred – expenditure claimed under the R&D tax incentive

    $20,000

    $200,000

    $170,000

    Determine trigger years

    The timing of the clawback adjustment depends on the trigger year(s). In this example, Company Z receives two instalments of the grant, one in the income year ending 30 June 2013 and one in the income year ending 30 June 2014. Therefore, Company Z has two trigger years, the income years ending 30 June 2013 and 30 June 2014.

    Income year ending 30 June 2012

    No clawback adjustment is required in this income year.

    Income year ending 30 June 2013

    Company Z calculates its clawback adjustment as follows:

    Clawback adjustment (before the calculation of the clawback cap)

    R&D expenditure ($100,000) x 10% = $10,000

    In this example, the cap does not limit the clawback adjustment.

    The extra income tax Company Z will need to pay for the income year ending 30 June 2013 is therefore $10,000.

    Income year ending 30 June 2014

    Company Z calculates its clawback adjustment as follows:

    Clawback adjustment (before the calculation of the clawback cap)

    R&D expenditure ($120,000) x 10% = $12,000

    In this example, the cap does not limit the clawback adjustment.

    The extra income tax Company Z will need to pay for the income year ending 30 June 2014 is therefore $12,000.

    End of example

    Example: Grant received after expenditure incurred

    Company L receives an Australian government agency grant in the income year ending 30 June 2012. The grant agreement between Company L and the Australian government agency requires that Company L spends $500,000 on certain R&D activities in the relevant income year. Once Company L spends this amount and meets other milestones, the Australian government agency pays the grant of $250,000. Company L claims the R&D tax incentive for the $500,000 expenditure it is required to incur under the grant agreement. Company L also claims the R&D tax incentive for an additional $200,000 it spent on the same R&D project in that income year. Company L determines that a clawback adjustment is required and works out its clawback adjustment for the income year ending 30 June 2012 as:

    R&D expenditure x 10%

    $500,000 x 10%

    = $50,000

    End of example

    Note that in this example, the cap does not limit the clawback adjustment.

    Related entities

    When working out your clawback adjustment, you also need to consider whether you have received or are entitled to receive any government recoupments relating to expenditure taken into account in working out the R&D tax incentive tax offset for an:

    • R&D entity connected with you
    • R&D entity that is an affiliate of yours or an R&D entity you are an affiliate of.

    Find out more
    Related entities

    End of find out more

    If you have received or are entitled to receive any government recoupment relating to expenditure taken into account in working out the R&D tax offset for one of the related entities specified above, you will also need to take your related entity's expenditure and combine it with your R&D expenditure, before applying the extra income tax rate of 10%.

    Example: Recoupment for a related entity

    In the income year ending 30 June 2012, Company E received a recoupment from an Australian government agency. The amount of the recoupment was $200,000. This recoupment was a reimbursement of expenses that Company E and Company F have incurred in the relevant income year.

    The recoupment reimbursed Company E for $150,000 of expenditure it has incurred in relation to an R&D project. The remaining $50,000 recoupment related to expenditure incurred by Company F for a related R&D project. Both Company E and F notionally deducted this reimbursed expenditure under the R&D tax incentive and therefore have claimed the R&D tax incentive tax offset for this expenditure in the relevant income year.

    In the relevant income year, Company E owned all the shares of Company F and controlled company F. Therefore, Company E is connected with Company F and will need to take into account the recoupment received for it and also its related entity Company F when calculating its clawback adjustment.

    Relevant R&D expenditure for the clawback adjustment calculation includes expenditure that both Company E and Company F can claim the R&D tax incentive tax offset for:

    $150,000 + $50,000

    = $200,000.

    Company E's clawback adjustment is:

    R&D expenditure ($200,000) X 10%

    = $20,000

    Therefore, Company E will need to pay additional income tax of $20,000 in relation to the recoupment in the income year ending 30 June 2012. This additional income tax includes an amount payable for that part of the recoupment that related to expenditure incurred by Company F.

    End of example

    A recoupment that is repaid

    You may have received a recoupment that may need to be repaid or partially repaid at a later date under the recoupment agreement. For example, the government repayment obligation may align with the success of the project. If the project is considered successful and a certain amount of sales are made in connection with the project, then you may be required to repay part of your recoupment to the government agency. Alternatively, a recoupment may need to be repaid if you have breached certain conditions of the recoupment agreement.

    If your grant is repaid to some extent in an income year, you may need to reduce the expenditure required to be incurred, which will reduce the extra income tax in relation to the year the grant was received. You will also need to recalculate your cap, to take into account a repayment by reducing the net amount of the recoupment by the amount of the grant that is repaid.

    If your recoupment is a reimbursement, you will need to adjust your calculation of the clawback adjustment to take into account that the recoupment has been reduced and therefore reimburses a lesser amount of the expenditure that you can claim a notional deduction and R&D tax offset in relation to.

    If you are required to repay all or part of your recoupment in an income year after the income year that you receive or are entitled to receive your recoupment, you may need to amend your income tax return (if you had previously lodged it with a clawback adjustment). You will need to work out the new clawback adjustment taking into account the repayment of the recoupment and change your clawback adjustment accordingly.

    Example: Repayment of reimbursement

    In the income year ending 30 June 2012, Company J carried out an R&D project and incurred R&D expenses of $400,000 for which the R&D tax incentive was claimed. During that year, the company also applied for funding from an Australian government agency funding program. As a result, Company J received a partial reimbursement of its expenditure of $200,000 in the same income year. In that income year, Company J also makes a clawback adjustment in its tax return which is worked out as follows:

    10% of $200,000 is $20,000.

    In the income year ending 30 June 2013 it was determined that Company J had breached the funding agreement and did not qualify for funding for all of the expenditure it had incurred. Therefore, Company J repaid $150,000 to the Australian government agency in the income year ending 30 June 2013. As a result, the clawback adjustment will need to be recalculated as follows:

    10% of $50,000 is $5,000.

    Therefore, Company J will need to amend its tax return to show a clawback adjustment of $5,000 in the income year ending 30 June 2012.

    End of example

    Example: Grant repayment

    Company U applies to a competitive grants scheme and receives $1 million toward its proposal to spend $10 million on final stage R&D activities during the income year ending 30 June 2012. The grant is repayable at 10 cents for every dollar on any sales over $5 million the project generates within three years.

    In the income year ending 30 June 2012, Company U spends $12 million on R&D activities for its project, including expenditure required to be incurred by the grant program of $10 million, which the company claims an R&D tax incentive tax offset for in the relevant income year.

    In the income year ending 30 June 2012, the company determines that clawback applies.

    Before working out the cap, the clawback is:

    10% x R&D expenditure

    10% x $10 million

    = $1 million

    The cap on clawback is equal to the clawback adjustment:

    $1 million x $10 million/$10 million

    = $1 million

    Part of grant later repaid

    In the income year ending 30 June 2013, Company U achieves sales of $6 million arising from the project and so repays $100,000 (10 cents for every dollar above $5 million) of the grant. The net amount of the recoupment is now $900,000 ($1 million less $100,000). Company U will need to recalculate its cap and clawback adjustment and lodge an amendment to its income tax return for the income year ending 30 June 2012.

    Clawback = 10% x $10 million= $1 million

    The cap is now recalculated as:

    ($1 million – $100,000) × $10 million/$10 million) = $900,000

    Company U's clawback adjustment is now $900,000 and the company lodges an amendment to take this into account. This may result in a tax refund of $100,000 in relation to the income year ending 30 June 2012 (depending on outstanding tax liabilities).

    End of example

    Find out more
    For more information about the calculation of the adjustment amount, refer to section 355-450 of the ITAA 1997External Link.

    End of find out more

    The impact on basic income tax liability

    Your clawback adjustment will increase your basic income tax liability on your taxable income beyond the amount worked out by applying the income tax rates to your taxable income.

    Example: Basic income tax liability

    Company Y has taxable income of $1 million in the income year ending 30 June 2013. Company Y applies tax rate of 30% to its taxable income, resulting in basic income tax liability on that taxable income of $300,000. Company Y also has a clawback adjustment of $200,000 that applies to the same income year. The company's basic income tax liability is adjusted to take into account the clawback adjustment:

    Basic income tax liability (including clawback adjustment)

    $300,000 + $200,000

    = $500,000.

    End of example

    Clawback and R&D partnerships

    There are special rules in Subdivision 355-J of the ITAA 1997 regarding the R&D tax incentive for certain types of partnerships known as R&D partnerships.

    If you are a partner of an R&D partnership you may also have to pay your proportion of extra income tax if recoupments are received that relate to expenditure on R&D activities by the R&D partnership and you are entitled to claim the R&D tax incentive for these activities.

    Specifically, you are taken to have:

    • incurred your proportion of partnership expenditure when the R&D partnership incurred that expenditure (including expenditure to acquire a depreciating asset)
    • received your proportion of the recoupment when the R&D partnership received the recoupment.

    These deeming rules mean that each R&D entity that is a partner of an R&D partnership can then determine if a clawback adjustment applies, when it applies and work out the amount of the clawback adjustment.

    Attention

    The R&D partnership does not make a clawback adjustment.

    End of attention

    Find out more
    For more information about R&D partnerships including what 'partnership proportion' means, refer to R&D partnerships.

    End of find out more

    Clawback and consolidation

    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) while they are 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.

    This is known as the single entity rule and it means that:

    • the actions and transactions of a subsidiary member are treated as having been undertaken by you, the head company
    • expenditure a subsidiary member incurs on R&D activities is taken to be incurred by you, the head company
    • you (and not your subsidiary member) may be entitled to the R&D tax incentive for expenditure on R&D activities undertaken by a subsidiary member while it was in your consolidated or MEC group.
    • you (and not your subsidiary member) may need to make a clawback adjustment if your subsidiary member has received a government recoupment in relation to notional deductions you take into account when claiming the R&D tax incentive tax offset.

    If you are the head company of a consolidated or MEC group and a subsidiary member joins or leaves your consolidated or MEC group, the entry history rule or exit history rule will assist you to calculate your liability for income tax or loss, which could be impacted by a clawback adjustment.

    For example, the entry history rule requires that after an entity becomes a subsidiary member of a consolidated or MEC group, everything that happened in relation to it before it became a subsidiary member is taken to have happened in relation to you (the head company) for the purposes of calculating your liability for income tax or loss.

    If a company received a government recoupment in the income year before joining your consolidated or MEC group, you are taken to have received that recoupment after the subsidiary member joined the consolidated or MEC group due to the entry history rule. You will then take this recoupment into account when determining if you need to make a clawback adjustment, its timing and amount, which will impact on your income tax liability.

    Find out more
    For more information about:

    End of find out more

    Transitional rules

    The R&D tax incentive applies to assessments for income years commencing on or after 1 July 2011. Before the introduction of the R&D tax incentive, the former R&D tax concession applied.

    The R&D tax incentive clawback rules differ from those that were formerly in place for the R&D tax concession. The R&D tax incentive imposes an extra income tax on certain recoupments. This compares to the R&D tax concession clawback under the former section 73C of the ITAA 1936, which reduced what all or part of could be claimed as an R&D deduction under the R&D tax concession from 125% to 100% of the expenditure incurred.

    If you claimed the former R&D tax offset instead of an R&D deduction, this would result in a reduction in the former R&D tax offset, as the former R&D tax offset is calculated based on R&D deductions the company could claim if it had not elected the former R&D tax offset.

    Under the former section 73C of the ITAA 1936, the reduction in your claim was calculated by working out the initial clawback amount (twice the amount of the grant or recoupment) which was then applied against expenditure on research and development activities (relevant expenditure) until it was completely absorbed.

    By applying the initial clawback amount against R&D expenditure, you reduce the claim from 125% to 100% of the expenditure incurred. The initial clawback amount was applied against relevant expenditure in the following order:

    • in the year of the grant/recoupment
    • in years before the year of the grant/recoupment in reverse chronological order
    • in chronological order in years after the year of the grant/recoupment.

    You may have received a grant or recoupment that was subject to the former clawback rules in section 73C of the ITAA 1936. It is possible that after you have applied the initial clawback amount against relevant expenditure as outlined above until 30 June 2011, that you may have a remaining initial clawback amount (which has not yet been absorbed) at that point in time. As the new clawback rules apply to income years commencing on or after 1 July 2011, this initial clawback amount is not applied to expenditure incurred in income years starting on or after 1 July 2011, as the new clawback rules generally apply from this point onwards.

    If you have received a recoupment that has instalments before and after 1 July 2011, you will need to consider which clawback rules to apply. For recoupments received in the income year ending 30 June 2011 you apply the former R&D tax concession clawback rules. For recoupments (including instalments) you receive in income years starting on or after 1 July 2011 (for example the income year ending 30 June 2012), you apply the R&D tax incentive clawback rules.

    However, there is a transitional rule that provides an exception. The effect of the transitional rule is that even though section 73C is repealed, the repeal can be disregarded in certain circumstances.

    For example, if you receive a recoupment of expenditure from an Australian government agency on or after 1 July 2011, for expenditure incurred before that date, you will need to reduce your claim for deduction for relevant expenditure (or R&D tax offset if you have elected this instead) using the former clawback rules in section 73C of the ITAA 1936 in earlier income years.

    Example: Reimbursement received in the income year ending 30 June 2012, partly for an earlier income year

    Company R is carrying out an R&D project in the income years ending 30 June 2011 and 2012. In the income year ending 30 June 2011, Company R incurs R&D expenditure that qualifies for a deduction under the former R&D tax concession under section 73B of the ITAA 1936 ($200,000). Company R claims this expenditure in its company tax return at a rate of 125%.

    In the income year ending 30 June 2012, Company R receives an Australian government agency recoupment of $50,000 of the expenditure incurred during the year ended 30 June 2011. An Australian government agency also provides a recoupment of expenditure that Company R incurred in the income year ending 30 June 2012 ($50,000) for which Company R determines it is entitled to claim the R&D tax incentive tax offset under Division 355 of the ITAA 1997. The total reimbursement received is $100,000.

    Income year ending 30 June 2011

    Company R determines it needs to amend its company tax return to apply the former clawback rules under section 73C of the ITAA 1936 to relevant expenditure it claimed under the R&D tax concession, for that part of the reimbursement received in the income year ending 30 June 2012 that related to the earlier income year ($50,000).

    Initial clawback amount

    50,000 x 2

    $100,000.

    Company R amends its claim for R&D expenditure in its tax return for the income year ending 30 June 2011 to apply clawback:

    R&D expenditure deductible at 100%$100,000

    R&D expenditure deductible at 125% $100,000

    Income year ending 30 June 2012

    Company R then applies the new clawback rules in subdivision 355-G of the ITAA 1997 to that part of the reimbursement that is received for expenditure incurred in the income year ending 30 June 2012. After determining that a clawback adjustment is required in this income year, Company R calculates its clawback adjustment (and extra income tax it will need to pay on this reimbursement) as follows:

    $50,000 x 10%

    $5,000

    End of example

    Example: Grant instalments received over the income years ending 30 June 2011 and 30 June 2012

    Company C conducts R&D activities and receives approval for a $200,000 an Australian Government agency grant for costs associated with the project. The grant is paid in instalments upon the incurring of relevant expenditure on an annual basis until the grant amount is exhausted.

    Income year ending 30 June 2011

    During the year ending 30 June 2011, Company C undertakes R&D activities and incurs $120,000 of expenditure that qualifies for the R&D tax concession.

    Company C receives a grant instalment of $120,000 in this year relating to the project.

    As the expenditure is incurred in an income year commencing before 1 July 2011, Company C claims the R&D tax concession, under the former section 73B of the ITAA 1936, for expenditure relating to the project.

    As the grant instalment of $120,000 is received in an income year commencing before 1 July 2011, Company C reduces its claim for the R&D tax concession using the former clawback rules in section 73C of the ITAA 1936.

    Income year ending 30 June 2012

    During the year ending 30 June 2012, Company C undertakes R&D activities and incurs related expenditure in excess of $80,000 that qualifies for the R&D tax incentive.

    Company C receives a grant instalment of $80,000 in this year relating to the project.

    As the expenditure is incurred in an income year commencing on or after 1 July 2012, Company C claims the R&D tax incentive, under the new rules contained in Division 355 of the ITAA 1997, for expenditure relating to the project.

    As the grant instalment of $80,000 was received in an income year commencing on or after 1 July 2011, Company C makes a clawback adjustment that relates to the $80,000 recoupment according to the clawback rules for the R&D tax incentive contained in Subdivision 355-G of the ITAA 1997.

    End of example

    Find out more
    For information about the former R&D tax concession, including the former clawback rules, refer to Part C-8External Link of the Guide to the R&D tax concession.

    End of find out more

    Whether recoupments are assessable income

    Recoupments (including grants) you receive for R&D expenditure that you claim the R&D tax incentive for must be included in your total assessable income unless they are specifically exempt under a provision of the ITAA 1936 or ITAA 1997.

    Find out more
    Section 6-5 of the ITAA 1997External LinkSection 20-25 of the ITAA 1997External LinkTaxation Ruling TR 2006/3External Link Income Tax: government payments to industry to assist entities (including individuals) to continue, commence or cease business

    End of find out more

    Other requirements

    If you are an eligible R&D entity and you want to claim the R&D tax incentive, you should consider the other requirements, including that you:

    • must register your R&D activities every year
    • can notionally deduct expenditure on R&D activities
    • may need to adjust your income tax return if
      • your eligible activities have produced tangible products for supply to someone else, or to be applied to your own use - other than in transforming these products for supply (feedstock adjustment)
      • you are registered for GST
       
    • must claim your R&D tax offset by lodging a company tax return and R&D tax incentive schedule at the end of your income year
    • must keep adequate records to demonstrate to AusIndustry, Innovation Australia and to us that you carried out the eligible R&D activities and that you did incur eligible R&D expenditure on those activities
    • must consider any special transitional rules that apply to situations that extend over income years where the R&D tax concession provisions and the R&D tax incentive provisions apply.

    More information

    If you need more information about whether your activities are eligible, you can ask AusIndustry (who act on behalf of Innovation Australia) for advice by:

    If you need more information about whether the expenditure you are claiming is eligible for the research and development (R&D) tax incentive, you can:

      Last modified: 06 Mar 2015QC 37973