ato logo
Search Suggestion:

Determine if a clawback adjustment is required

Last updated 8 February 2023

How to work out if this applies to you and the 3 questions you answer to see if a clawback adjustment is required.

How to work out if this applies to you

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 (STB), (other than under the CRC program)
  • 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 of notional deductions where the expenditure was for a depreciating asset used in those activities).

Three questions you must answer

Answer each of these 3 questions to work out how a clawback adjustment may affect you.

If you answer yes to:

  • all questions (1, 2 and 3), you need to make a clawback adjustment
  • questions 1 and 2 only, you  
    • don't need to make a clawback adjustment now
    • may need to make a clawback adjustment in the future if you later answer yes to question 3.

Question 1 – received a recoupment

Have you or a related entity received or are entitled to receive a recoupment during the income year?

How to answer question 1

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

If you don't satisfy this requirement, you don't need to make a clawback adjustment and don't need to answer questions 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 2 broad categories of recoupment:

See Section 20-25 of the ITAA 1997 for the definition of recoupment.

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 2022. In the income year ending 30 June 2023, 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 expenditure notionally deducted under the R&D tax incentive. Company C has received a recoupment of expenditure that 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 agency 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 doesn't 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 that 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 aren't 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 doesn't 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 2021, 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 2022 and 30 June 2023. 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 2021. In the income year ending 30 June 2022, 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.

Company A – grants received

Notification to agency

Instalment paid

Amount

30 September 2021

21 October 2021

$25,000

23 December 2021

20 January 2022

$25,000

26 March 2022

6 April 2022

$25,000

25 June 2022

20 July 2022

$25,000

In the income year ending 30 June 2022, Company A received the first 3 instalments of $25,000 listed in the table above (totalling $75,000). 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 2022 it was entitled to receive the final $25,000 instalment for the 2022 income year.

As at 30 June 2022, 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 2023. This is because as at 30 June 2022 they have not met the conditions relating to the remaining grant instalments.

End of example

Question 2 – who the recoupment was from

Is the recoupment from an Australian government agency or a state or territory body?

How to answer question 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 doesn't 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 aren't R&D activities. This because an R&D tax offset can only be claimed on R&D activities.

If you have received a recoupment but it is not from an Australian government agency or an STB, you don't need to make a clawback adjustment and you don't need to answer question 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 a Commonwealth Department 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.

You don't need to make a clawback adjustment for recoupments received under the CRC Program.

For information about the funding programs provided, visit the grants & programs section on business.gov.auExternal Link.

State or territory body

Division 1AB of the Income Tax Assessment Act 1936 (ITAA 1936) sets out the ways in which 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.

For the definition of government entity, refer to section 24AT and section 24AU of the ITAA 1936.

For more information about the 5 different ways that a body can be an STB, refer to:

For more information about question 2, refer to:

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 2022. Company B receives a partial reimbursement for their expenditure from a funding program of AusIndustry. As this Department is an Australian government agency, the answer to question 2 is 'yes' and Company B may need to make a clawback adjustment.

End of example

Question 3 – claimed the R&D tax incentive tax offset

Have you claimed the R&D tax incentive tax offset for expenditure that relates to the recoupment?

How to answer question 3

You need to make a clawback adjustment if all or some of the expenditure for which the recoupment is received, or is entitled to be received, 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.

Expenditure is taken into account in working out an R&D tax offset if you 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 of R&D assets (if the expenditure incurred was to acquire R&D assets). The notional deductions that may be taken into account in working out your R&D 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 in an earlier year
  • CRC contributions.

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.

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 2022. 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 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 offset is claimed.

End of example

If you don't answer yes to question 3 you don't need to make a clawback adjustment at present.

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

For example, you may not be entitled to claim the R&D 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 answer yes to question 3, which will require you to amend your company tax return for the previous income year.

Expenditure not at risk

In some cases, if you receive or are entitled to receive a recoupment, section 355-405 of the ITAA 1997 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 offset for any expenditure related to the recoupment because section 355-405 applies (the expenditure is not at risk), you don't answer yes to question 3 and don't 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.

Related entities

When working out if the need for a clawback adjustment will arise in the current or a future year, you also need to consider whether you have claimed or will claim in the future an R&D tax offset for expenditure that has the required connection with any government recoupment received or entitled to be received by:

See Who can claim for more information on R&D entities.

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 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.

An affiliate of you

A company or individual 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.

QC71313