You assess whether your entity is eligible to register R&D activities and claim R&D tax offsets in any given year.
Broadly speaking, your eligibility to claim R&D tax offsets will depend on whether you are an R&D entity and, if you are, whether you have incurred notional deductions of at least $20,000 on eligible R&D activities.
You can only claim an R&D tax offset if you are an R&D entity. You are an R&D entity if you are a corporation that is any of the following:
- incorporated under an Australian law
- incorporated under a foreign law but an Australian resident for income tax purposes
- incorporated under a foreign law and you are both
- a resident of a country with which Australia has a double tax agreement that includes a definition of 'permanent establishment'; and
- carrying on business in Australia through a permanent establishment as defined in the relevant double tax agreement.
You aren't eligible for an R&D tax offset if you are:
- an individual
- a corporate limited partnership
- an exempt entity (where your entire income is exempt from income tax)
- a trust (with the exception of a public trading trust with a corporate trustee).
If you are an R&D entity, you may also need to consider the special rules applied to consolidated groups and R&D partnerships. Other conditions may also apply, depending on who the R&D activities are being conducted for.
There are special rules to consider if you are a member of a consolidated group or a multiple entry consolidated (MEC) group.
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) for as long as they remain 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 conducting all R&D activities within the group. This means only the head company of the group should register for, and claim, the tax incentive for these R&D activities.
Special rules also apply if you are a partner in an R&D partnership. An R&D partnership is one where each partner meets the definition of an R&D entity.
The partnership itself is not eligible to claim the R&D tax incentive for the R&D activities it undertakes because it is not an R&D entity. However, the partners may be able to claim for R&D activities the partnership has undertaken.
If you are a partner in an R&D partnership, you should register your R&D activities with the Department of Industry, Innovation and Science before making a claim.
In most cases, you can only claim an R&D tax offset for expenditure on R&D activities conducted for you rather than for another entity.
Working out who the R&D activities are conducted for involves determining who receives the major benefit from carrying out the activities (for example, who owns the results of the activities).
Usually, you won't be able to claim for expenditure on R&D activities you conducted to a significant extent for another entity. However, provided all other eligibility requirements are met, the entity receiving the major benefit from the R&D activities may be able to claim these amounts.
If you meet certain conditions, you may also qualify for an R&D tax offset if either:
- your R&D activities are conducted for an associated foreign corporation that is a resident of a country with which Australia has a comprehensive double tax agreement
- you are a foreign corporation carrying on your business through a permanent establishment in Australia and the R&D activities are conducted for you and not for the permanent establishment.
Your eligibility to claim the R&D tax offset will also depend on where you are conducting your R&D activities and, importantly, what those activities are.
Where you are conducting your R&D activities
Generally, only R&D activities conducted in Australia qualify for the R&D tax incentive. However, R&D activities conducted overseas also qualify if Innovation and Science Australia makes a Finding that your activities meet the conditions specified in section 28D of the Industry Research and Development Act 1986 (IR&D Act). More information can be found on the Department of Industry, Innovation and Science's websiteExternal Link. R&D activities must meet certain criteria to be eligible for the R&D tax incentive: they must be classified as either core R&D activities or supporting R&D activities.
Core R&D activities
Core R&D activities are experimental activities whose outcome can't be known or decided in advance on the basis of current knowledge, information or experience. They can only be decided by applying a systematic progression of work that all of the following statements apply to:
- It is based on principles of established science.
- It proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions.
- It is conducted for the purpose of generating new knowledge (including about creating new knowledge or improved materials, products, devices, processes or services).
Some types of activities are specifically excluded from being core R&D activities. For a list of excluded core R&D activities, see Department of Industry, Innovation and Science's websiteExternal Link.
Supporting R&D activities
A supporting activity is one that is directly related to core R&D activities or, for certain activities, has been undertaken for the dominant purpose of supporting core R&D activities. Your activities must satisfy the dominant purpose requirement if they either:
- produce, or are directly related to producing, goods or services
- are excluded from being core R&D activities.
For more detailed information about core R&D activities and supporting R&D activities, refer to the Department of Industry, Innovation and ScienceExternal Link's website.
You may be entitled to an R&D tax offset if your total notional deductions for an income year are at least $20,000.
If your total notional deductions are less than $20,000, you will only be able to obtain the R&D tax offset for:
- expenditure incurred to a Research Service Provider (RSP) for services within a research field for which the RSP is registered under the IR&D Act, where that RSP isn't an associate of the R&D entity
- expenditure incurred as a monetary contribution under the Co-operative Research Centre (CRC) programExternal Link.
Before making a claim for the R&D tax incentive, you need to decide whether your expenditure is eligible or ineligible under the R&D incentive.
If you are an R&D entity your notional deduction amounts you can claim may be for:
- expenditure incurred on R&D activities, including expenditure on overseas activities covered by an Advance Finding from Innovation Australia, amounts paid to associates and expenditure to an RSP
- the decline in value of assets used for conducting R&D activities (including R&D partnership assets)
- balancing adjustments for assets used only for conducting R&D activities (including R&D partnership assets)
- expenditure for goods and materials transformed or processed during R&D activities to produce marketable products (feedstock expenditure)
- monetary contributions under the CRC program.
You are entitled to a notional R&D deduction for expenditure described above to the extent that:
- your expenditure is of a kind eligible for the R&D tax incentive
- you incur expenditure during the income year (other than an amount you incur to an associate but don't pay until a later income year) on one or more registered R&D activities.
As a result, the general rule is that expenditure on R&D activities is claimable in the income year it is incurred. The exceptions to this rule are when:
- an amount of expenditure is incurred but not paid to an associate
- the prepayment rules apply to expenditure for services to be provided over a period.
Eligible expenditure on your R&D activities must be claimed under the R&D tax incentive. If you choose not to claim eligible expenditure under the R&D tax incentive, you can't claim it elsewhere in your tax return. This is different to the former R&D tax concession, where you could choose to claim an amount under another deduction provision.
You can't notionally deduct the following types of expenditure under the R&D tax incentive:
- interest expenditure (within the meaning of interest in the withholding tax rules)
- expenditure that is not at risk
- core technology expenditure
- expenditure included in the cost of a depreciating asset (decline in value notional deductions may apply however)
- expenditure incurred to acquire or construct a building (or part of a building or an extension, alteration or improvement to a building).
These types of expenditure don't warrant the enhanced tax benefits available under the R&D tax offsets. However, they should be considered under the normal deduction provisions of the income tax law because you may still be able to deduct these amounts from your assessable income.
Taxation Ruling TR 2021/5 Income tax: research and development tax offsets: the ‘at risk’ rule sets out the provisions that prevent an entity from notionally deducting expenditure that is not 'at risk'.