Find out when feedstock adjustments are required under the research and development (R&D) tax incentive.
A feedstock adjustment applies when your R&D tax offset includes amounts for feedstock expenditure incurred on R&D activities. You will need to include an amount in your assessable income when those activities produce tangible products that are either:
- supplied to others
- applied to your own use.
The feedstock adjustment applies to the following amounts claimed in any year as a notional R&D deduction:
- 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 feedstock input
- decline in value of assets used in acquiring or producing the feedstock inputs.
The feedstock provisions:
- apply to both core and supporting R&D activities that transform or process feedstock inputs
- are not confined to mass production or industrial activities, and can have application to agricultural production processes.
If a feedstock adjustment is triggered, you must include an amount in your assessable income. This may be in the current or future income year, depending on when the output is sold or applied.
The feedstock rules work by increasing your assessable income, rather than by reducing the deductions or offset you can claim.
The feedstock rules effectively adjust the R&D tax incentive benefit you receive for your expenditure on certain 'inputs', reflecting the value of the related 'outputs'.
The feedstock adjustment is intended to recover the 'incentive' component of the R&D tax offset you receive for your feedstock expenditure. That is, the amount you receive above the general tax deduction that would otherwise be available.
A feedstock adjustment will not be triggered, unless you have claimed the R&D tax incentive for expenditure on one or more of the following:
- acquiring or producing feedstock inputs (including the decline in value of depreciating assets)
- energy inputs directly into the processing or transformation of the feedstock inputs.
The feedstock adjustment is triggered in the year in which you either:
- sell, or otherwise supply to someone else, the feedstock output, or a marketable product derived from it
- apply that output or product to your own use (unless it is for the purpose of transforming that product for supply to someone else).
The feedstock adjustment also applies where an affiliate or an entity connected with you supplies or uses the marketable product as if you had done so.
The feedstock adjustment can be triggered during the income year in which you claimed the R&D incentive, or a future income year.
You can find more information at Grouping for aggregated turnover purposes.
Where the feedstock output is immediately sold or applied, the feedstock revenue will be its market value at that point. Where further expenditures are incurred on the feedstock output between the R&D activity and the point of sale or application to own use, then the feedstock revenue will be a proportion of the value of the marketable product that is sold or applied.
Feedstock revenue is calculated as follows:
Your feedstock adjustment amount is calculated on the lesser of:
- expenditure in acquiring or producing feedstock inputs and energy inputs for which you have claimed the incentive, to the extent that it is reasonably attributable to the production of the relevant feedstock output for the year (feedstock expenditure)
- feedstock revenue.
To calculate the amount to include in your assessable income for your feedstock adjustment in the trigger year, work out:
- the clawback amount, which is the lesser of the following 2 amounts
- feedstock expenditure relevant to the feedstock output
- feedstock revenue
- the grossed-up value of incentive component of the clawback amount obtained in the step above, using the formula below:
This formula calculates an amount on a year-by-year basis and the total of the amounts worked out for each offset year is included in assessable income for the trigger year.
The 'starting offset' is the actual amount of R&D tax offset that includes the feedstock expenditure being clawed back. The formula is used separately for each offset year that includes the feedstock expenditure being clawed back.
The 'adjusted offset' is the offset amount that the entity would have received for the offset year if its notional R&D deductions were reduced by the clawback amount.
The 'deduction amount' is the clawback amount multiplied by the R&D entity's company tax rate in the offset year. By subtracting this, the clawback only includes the incentive component of the tax offset.
The amount worked out above is then grossed-up for the entity's company tax rate for the current year to work out the equivalent amount to include in assessable income.
This formula is also used to calculate the assessable income included in relation to other clawback amounts for balancing adjustments, for depreciating assets and some government grants. The formula will be used repeatedly where there is more than one clawback amount.
For more tools to calculate the amount for your feedstock adjustment, refer to the:
Where you have triggered a feedstock adjustment for an output you applied to your own use (other than use for the purpose of further transformation of the product for supply) and you later sell it (with or without further transformation), the sale will not trigger another feedstock adjustment.
If you use a feedstock output yourself on a recurring basis, only the first use can trigger the feedstock adjustment.
Where a feedstock output from one R&D activity is used as a feedstock input for a later R&D activity, no feedstock adjustment will apply to it at that stage. The feedstock adjustment will only apply to the feedstock output from the final R&D activity in the chain.
However, there may be a feedstock adjustment for any by-products that are produced as feedstock outputs before the final R&D activity. The relevant feedstock expenditure would be the amount of any feedstock expenditure that is reasonably attributable to the by-product.
If the by-product is used as a feedstock input for a later R&D activity, it will not attract a feedstock adjustment at this time.
Several feedstock inputs can be processed to create a single feedstock output and vice versa.
Where you produce multiple feedstock outputs from an R&D activity, a feedstock adjustment will apply to each of them. The relevant feedstock expenditure for each of those outputs is the amount of feedstock expenditure reasonably attributable to the production of each of them.
This means where your R&D activity produces multiple feedstock outputs that are:
- substantially identical, those outputs can be treated as a single feedstock output for practical purposes
- similar items of variable quality, you can treat the faulty items separately from the successful ones.
Example: feedstock adjustment clawback amount
Landscape Supplies Pty Ltd (Landscape Supplies) trials an experimental granite crushing process to produce marketable granite sand, with the sand produced being sold for $9,000 in the 2021–22 income year. Landscape Supplies has aggregated turnover in that year of $15 million. The company's tax rate is 25%.
The notional R&D deductions the company can claim for the related R&D activities are $22,000 in the 2021–22 income year, which includes $10,000 in feedstock expenditure. The company has no other clawback amounts.
All the granite sand produced is sold during the same year, the feedstock revenue is $9,000. This means the Landscape Supplies will calculate the amount to be included in assessable income for their feedstock adjustment as follows:
- Landscape Supplies determines the lesser of feedstock revenue ($9,000) and feedstock expenditure ($10,000) to clawback which is $9,000.
- The company then determines part of the clawback amount determined at Step 1 above to be included in assessable income by applying the following formula:
The starting offset amount is calculated by multiplying the notional deductions by the refundable tax offset rate of 43.5% which is calculated as:
- $22,000 × 43.5% = $9,570.
The adjusted offset is calculated by reducing the notional R&D deduction by the clawback amount and multiplying the result by the refundable tax offset rate of 43.5% which is calculated as:
- $22,000 − $9,000 = $13,000
- $13,000 × 43.5% = $5,655.
The deduction amount is calculated as the clawback amount multiplied by the company's tax rate for the 2021–22 income year which is calculated as:
- $9,000 × 25% = $2,250.
The difference between the starting offset and adjusted offset reduced by the deduction amount, is calculated as:
- $9,570 − $5,655 − $2,250 = $1,665.
This is the incentive component of the R&D tax offset on the feedstock amount that is clawed back. This amount is divided by the company's tax rate to calculate the equivalent amount to include in assessable income:
- $1,665 ÷ 25% = $6,660.
Landscape Supplies includes $6,660 in its assessable income for the 2021–22 income year.End of example
For information on eligible entities and how to claim the incentive:
- phone us on 13 28 66 between 8:00 am and 6:00 pm Monday to Friday.
For information on registration, eligibility of R&D activities and findings, you can contact AusIndustry by:
- phone on 13 28 46
- submitting an email enquiry External Link
Refer to Contact us on the business.gov.auExternal Link website for the full list of contact details.Find out when feedstock adjustments are required under the research and development (R&D) tax incentive.