What is the R&D Tax Incentive?
The R&D tax incentive is a rebate you get for developing new products and services. It allows you to claim back up to 43.5% of the costs related to research and development.
How does the R&D tax incentive work?
You need to undertake eligible R&D activities that involves research and experimentation.
You also need to:
- spend over $20,000
- operate as company (no trusts, partnerships, sole traders)
- undertake R&D activities in Australia
How do I claim R&D tax relief?
You will be asked to break down your R&D experiment into two key components:
- Outcome – whether an expert could predict the outcome in advance
- Purpose – the R&D is conducted for the purpose of generating new knowledge
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How is the R&D tax credit calculated?
The R&D tax incentive provides a tax rebate of between 8.5% to 43.5%.
So if you spend $100,000 on developing a new product, you could get back between $8,500 and $43,500 depending on the company revenue and profitability.
If you are in profit, you are likely to get an R&D tax offset rather than cash back.
See the R&D tax calculator for information.
Are you doing R&D?
To be eligible for the R and D tax incentive, you need to ask yourself if what you are doing can be considered innovative in your field:
- Novel – Are you developing something that does not currently exist?
- Testing – Have you needed to test and develop what you are creating?
You could be:
- developing new software for the hospitality industry
- crafting bespoke solutions using raw materials
- engineering new devices for tracking and monitoring equipment.
How does the government define R&D?
This is how the government define research and development in the R&D tax incentive legislation:
“Core R&D activities are experimental activities whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work “
But, are you an expert?
The government want to know whether an expert could predict the outcome?
So, if you know what you are doing, then the R&D Tax Incentive could be a good grant to go for.
Speak to an R&D tax incentive consultant for more information of how R&D grants work.
How to Maximise the R&D Tax Incentive
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What is an R&D grant?
An R&D grant is money you get back from the ATO for conducting eligible research and development activities. An R&D grant goes by many names including the R&D tax offset, R&D tax credit or R&D tax rebate. But they are all refer to the ATO R&D tax incentive.
This can be either in the form of cash back or a credit on the tax you need to pay.
The R&D grant ranges from 8.5% to 43.5%.
What is the R&D tax offset?
The R&D tax offset gets its name from the fact that the R&D rebate is offset against the tax that you owe.
So, say you owe $100k in tax and your R&D rebate is worth $30k, then your tax payable reduces to $70k.
If you earn less than $20M and are in loss, then you will get a cash rebate.
What is the R&D tax credit?
The R&D tax credit applies to companies earning over $20M. If there is no tax to pay, then the R&D tax credit will sit there like a carry forward loss and used in the future. There is no cash back.
Is R&D tax offset taxable?
The R&D tax offset is not taxable. It operates like a tax refund.
But, you need to check a few things with your accountant like:
- Add back the expenses Label 7D in the Income Tax Return.
- Include the rebate amount in the franking credits
Your accountant will be able to assist further with this, or send me an email.
What is an R&D company?
You can only claim the R&D grant if you have a company. Typically this is a Pty Ltd company. Entities that are excluded are, individuals, partnerships and sole traders.
Here is some additional information that might help you out with the R&D tax incentive:
- R&D tax incentive calculator – determine your likely R&D tax rebate
- R&D tax incentive feedstock – how to work out the feedstock adjustment
- R&D tax incentive application – what is the activity registration all about
- R&D finance – what lenders can you give you an advance on your R&D rebate
- R&D Tax incentive consultant – how can an expert tax advisor help you with your claim
- R&D Tax Incentive record keeping – what can you do to keep better records
- R&D Tax Incentive e-learning course – brush up on your R&D knowledge
- Tax Incentive for Early Stage Investors – your investors can also get a deduction for giving you cash
Proposed R&D Tax Incentive Changes
The proposed changes are yet to pass through Parliament:
- Annual Cap – $4 million annual cap on cash refunds on companies with a turnover of less than $20M
- Maximum Expenditure – An increase of maximum R&D expenditure eligible for R&D tax offsets from $100 million to $150 million per year, for companies over $20M (although, expenditure on clinical trials will not count towards the cap)
- R&D Intensity – The R&D premium was 8.5% above the company’s tax rate for companies with revenue greater than $20M.It will now be:
- 4 % for R&D expenditure between 0% – 2%
- 5 % for R&D expenditure between 2% – 5%
- 9 % for R&D expenditure above 5% – 10%
- 5% for R&D expenditure above 10%
R&D Tax Incentive – Latest News
11 September 2019 – R&D funding fell by $4 billion and explorers, tech are suffering
With the Morrison government obsessed with achieving the first budget surplus since the GFC, research and development schemes suffered substantial cuts in April’s budget.
A report at the end of August showed total cuts amounted to $4 billion. Shadow minister for industry and small business Brendan O’Connor labelled the investment figures “dismal”.
28 August 2019 – Ombudsman investigating R&D Tax Incentive processes
The Australian Small Business and Family Enterprise Ombudsman will release a report shortly on the Australian Taxation Office’s enforcement of R&D Tax Incentive claims.
A statement from the office of the Ombudsman, Kate Carnell, said she was concerned by reports on how $200 million was “clawed back” in the 2018/19 financial year from incentive claims made. Carnell said a number of complaints had been heard about unfair treatment from the ATO and AusIndustry.
20 August 2019 – Monadelphous repays R&D rebate
The “build at all costs” mentality that drove the resources boom may never return as customers slash costs, Monadelphous chief executive Rob Velletri has warned after the engineering group delivered a 29 per cent drop in annual net profits to $50.5 million.
Monadelphous’ margins, which have been falling every year since 2015 when they were running at 9 percent, weakend further in 2018-19 dropping to 6.6 percent from 6.7 percent a year earlier.
The Perth-based company’s net profits were hit by a $7 million provision after being forced to repay money to the tax office for research and tax incentives it had claimed in 2015 an 2016 that were later found to be ineligible.
19 August 2019 – Cochlear CEO hasn’t ruled out offshore R&D move
Cochlear chief executive Dig Howitt has not ruled out the possibility of shifting more of the hearing implant maker’s research and development operations offshore, as it continues to be courted by foreign governments. Cochlear CEO Dig Howitt wants the government to wind back the cuts to the R&D tax incentives. Edwina Pickles
Mr Howitt, who was appointed chief executive last year, urged the government to develop policies that would keep local multinationals in Australia and ensure the country’s international competitiveness.
6 August 2019 – R&D reform possible for tech start ups.
Industry, science and technology minister Karen Andrews has flagged a willingness to re-examine how software companies are assessed for future research and development tax incentives and will establish a new digital economy and technology division within her department, following a closed-door meeting with start-up industry insiders on Friday.
26 July 2019 – Federal court decision on R&D Tax Incentive matter
The Federal Court handed down its decision in Moreton Resources Limited and Innovation and Science Australia. The court remitted the matter back to the AAT for further consideration. The matter related to the AAT’s decision last year concerning the eligibility of an underground coal gasification pilot project.
The AAT will now reconsider the merits of Applicant’s claims in accordance with the judgment handed down yesterday.
The Court hears appeals on questions of law from the AAT. It is important for program participants and their advisers to understand the decisions of the Court and the AAT in relation to the R&D Tax Incentive program because they can provide useful interpretive guidance.
2 July 2019 – Independent review upholds department’s position on keeping evidence
The Administrative Appeals Tribunal has highlighted the importance of keeping evidence when conducting your R&D activities in its decision on Ultimate Vision Inventions Pty Ltd and Innovation Science Australia.
This decision offers important guidance on evidence you need to support your R&D Tax Incentive claims, including:
- Evidence that supports the description of your registered activities
- Evidence that demonstrates that your R&D meets the eligibility criteria, such as:
- That the purpose of conducting your R&D was to generate new knowledge
- That your activities followed the scientific method
- That an experiment was needed to determine the outcome of your activities
To help you understand what evidence you need to keep when conducting your R&D activities head to our record keeping webpage.
25 June 2019 – Fix R&D, visas if you want to help tech
The technology, science and venture capital industries have leapt on Prime Minister Scott Morrison’s request that they identify regulatory roadblocks to investment, naming cuts to research and development incentives and “walls” against importing talent as the worst job-killers.
Other bugbears are the double taxation of “patient” capital from offshore, government reluctance to back start-ups in procurement, and “Defence-led” policy hurting local technology firms, such as this year’s anti-encryption laws.
He welcomed the Prime Minister’s promise to remove bureaucratic barriers, made during a speech to the WA Chamber Of Commerce & Industry on Monday, as a sign the government may be backtracking on its controversial R&D crackdown.
Reversing the $4 billion cut from the R&D Tax Incentive over the past two budgets was the “single most valuable lever” available to the government to spur business investment, said chief operating officer of StartupAUS Alex Gruszka.
24 June 2019 – Applications for Advance and Overseas Findings close 1 July 2019
Are you doing most of your R&D in Australia, but doing some activities overseas because they can’t be completed in Australia? You may be able to claim an R&D tax offset for your overseas expenditure if you obtain an Overseas Finding.
Overseas Findings applications must be submitted before the end of the first income year in which you started the overseas R&D activities.
Click below to find out more about Advance and Overseas Findings and how to apply.
2 April 2019 – Federal Government cuts
The Federal Government has cut another $1.35 billion from its research and development tax incentive over the forward estimates, according to the Budget papers. It adds on to a sum of more than 2 billion that was cut in the previous budget, with that instrument aiming to save $2.4 billion on the scheme over the following four years.
The government has not provided any clarity on the research and development tax incentive in the federal budget, it’s unclear whether the cut is due to a reduced number of claims made under the scheme as a result of tightened definitions of ‘R&D’ or if it’s the result of planned amendments to the scheme which have not yet passed Parliament.
It’s a further blow for the Australian tech and startup sectors, which had already railed against changes to the scheme – far and away the most popular of all government support mechanisms for the industry.
18 March 2019 – CBA settles R&D tax matter
Commonwealth Bank of Australia (CBA) and the Australian Taxation Office (ATO) have entered into an agreement relating to Research and Development (R&D) tax claims.
Under the agreement terms, CBA has agreed to withdraw from all current proceedings with the ATO and Innovation and Science Australia (ISA) before the Administrative Appeals Tribunal (AAT) in respect of the eligibility of R&D claims that were made for the years ended 30 June 2012 and 30 June 2013 relating to the CBA core banking modernisation project that involved digital transformation and software development. All other prior year matters have also been finalised.
The agreement does not result in material impacts to CBA’s current or future year financial results.
CBA will continue to work collaboratively with the ATO and ISA in relation to future registration of eligible R&D activities.
11 February 2019 – R&D tax changes delayed
The federal government has been told to delay planned changes to R&D tax incentives, with a parliamentary committee warning against a retrospective crackdown and fears some firms could move operations overseas.
Changes announced in the 2018 federal budget would have introduced caps on cash refunds for the incentive at $4 million for companies with an aggregated turnover of less than $20M annually, with the exception of clinical trials. For companies with a turnover of more than $20M, the amount of R&D tax offset they received would be determined by the intensity of their R&D expenditure as a proportion of total expenses.
The threshold on R&D expenditure that attracts concessional R&D tax offsets will be lifted to $150M from $100M, allowing more companies to access the scheme. Under a so-called intesity test, companies that spend less than 2 per cent of their sales on R&D will be able to deduct that spend from their taxable income at a rate of just 4.5 per cent above their standard company tax rate. The remaining 3000 firms claim the non-refundable R&D tax offset.
18 December 2018 – PWC Investigated
You may have seen in the paper recently that the government has been cracking down more on the R&D Tax Incentive.
This time, it’s not just dodgy consultants but some rather large operations.
PwC has been investigated by the ATO has since closed down the majority of its R&D team.
How to Maximise the R&D Tax Incentive
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R&D Tax Incentive – Latest Recipients
16 July 2019 – Australian Potash received $1,300,000
Australian Potash Ltd (ASX:APC) has received an R&D tax incentive rebate of $1.3-million research and development tax incentive to complete work streams feeding in to the DFS which will see the company and the Lake Wells SOP Project well-positioned to play a leading part in the emerging SOP landscape in Western Australia. The incentive’s related to activities undertaken during the financial year ending 30 June 2018.
Australian Potash Limited is a minerals exploration company focused on advancing its key project, the Lake Wells Potash Project.
16 May 2019 – Flamingo Ai received $1,128,032
Flamingo Ai has received an R&D tax incentive rebate of $1,128,032 for research and development of the company’s Cognitive Virtual Assistants, Journey Assist Platform and its Unsupervised Machine Learning Algorithms.
Flamingo Ai is an Enterprise SaaS company that provides Intelligent Assistants, FAQ & Knowledge Retrieval Assistants along with Data Science as a Service business analytics.
12 April 2019 – Australian Vanadium received $113,660
Australian Vanadium has received an R&D tax incentive rebate of $113,660 for research and development of processing techniques to produce vanadium from a poly-metallic ore for vanadium redox flow batteries (VRFB) and steel applications.
13 March 2019 – ResApp receives R&D Advanced Overseas Finding
ResApp Health has received an R&D tax incentive Advanced/Overseas Finding for clinical study expenditure associated with its US based paediatric and adult clinical studies for the diagnosis of respiratory disease using cough sounds.
The company now estimates that it will receive an R&D rebate of approximately $1,700,000 for the financial year ended 30 June 2018.
07 March 2019 – Immutep receives $872,351
Immutep has received an R&D tax incentive rebate of $872,351 for research and development of a Phase I clinical study in melanoma using its lead compound eftilagimod alpha.
Immutep is a biotechnology company, engages in the research, development, and commercialisation of immunotherapeutic products for the treatment of cancer and autoimmune diseases.