The Research and Development (R&D) Tax Incentive is an eligibility entitlement program administered jointly by the Department of Industry, Innovation & Science and the Australian Taxation Office (ATO). The department manages the registration of the company’s R&D activities while the ATO is responsible for managing the eligible activities’ costs.

The words “eligibility entitlement” in the previous paragraph needs further explanation: rather than being a competitive grant based on somebody’s judgement, the R&D tax incentive is a self-assessment program. If the company assesses that it has spent funds on R&D that fits the eligibility criteria and has kept evidence to prove it, then it is entitled to the benefit.

The program requirements include:

  • Identifying at least one core activity, defined as experimental activities conducted where:
    • The outcome cannot be determined in advance
    • A systematic progression of work has to be applied using the scientific methodology proceeding from hypothesis to experiment, observation, evaluation and conclusion.
    • It reveals new knowledge on a worldwide basis.
  • Identifying any supporting activities that may have been undertaken for the dominant purpose of supporting a core activity.
  • Maintaining contemporaneous evidence of both activity and labour related to these activities.

Further eligibility criteria include:

  • The claimant must be a company incorporated by Australian law. Trusts are not directly eligible but they are a common vehicle used for IP protection and there are avenues that might make R&D compatible.
  • The R&D must be conducted in Australia. There are nuances associated to claiming work done overseas: some include whether or not there was access to expertise, physical equipment or geographical features or population (of living things) needed to test the R&D in Australia. If some of your R&D must happen overseas, it is worthwhile having a professional R&D Tax consultant assess your situation.
  • To receive a refundable tax offset of 43.5%, the company’s annual turnover must be under $20 million. If it is over $20 million, the offset becomes non-refundable at 38.5% for the first $100 million eligible expenditure.

Now that we’ve covered the requirements of the incentive, let’s explore the practical points involved in preparing and claiming:

  • Labour costs are by far the biggest R&D expenditure for many companies. From paying contractors to employees, salary package costs account for a significant portion that can be partly reimbursed by this rebate. However, many company founders, particularly in the early startup phase don’t pay themselves a salary. It may be advisable for company founders to put themselves on the payroll to ensure their time – whether it be in a technical or management capacity – is also being claimed as part of the R&D expenses. But circumstances vary, so it’s a good idea to have a professional R&D Tax consultant assess your situation.
  • Document everything! It is imperative that contemporaneous evidence of the R&D – including planning sessions, research conducted, whiteboarding sessions and meetings with industry experts relevant to your R&D is maintained. As many startups follow agile development methodologies and the time to market is a critical factor in some cases, this essential requirement of the R&D tax incentive is sometimes compromised. Use technology to your advantage – record your meetings, snap photos of the blueprints drawn on the back of napkins or use a task management tool like Atlassian’s Jira as you go.
  • Invest in a time-keeping and project management system to record and manage your R&D. These don’t have to be complicated timesheets or diaries, several apps and plugins to task management systems like JIRA now make it relatively easy to record time spent on projects.
  • Analyse your company’s R&D expenditures over a financial year. Depending on individual circumstances, it starts making financial sense to claim once R&D expense exceeds $60,000 in a given year. This ensures that you get a decent rebate.
  • Consider engaging a professional R&D tax incentive consultant to help you prepare the evidence describing your R&D activities in a manner as required by the ATO and Department of Industry, Innovation & Science.

For further information about the incentive, visit the Business.gov.au website.

About the author

Lakshmi Singh – Senior Technical Writer, Access RnD Tax Solutions

Lakshmi is a software engineer with extensive experience writing on technical and business topics where she has published articles in mainstream print and digital media; written successful tender responses, marketing and technical documentation for IT vendors; and many R&D tax incentive submissions.  Lakshmi is highly skilled as a workshop facilitator sourcing information from which she creates relevant content.

Access RnD is a boutique, independent specialist tax consultancy on the R&D tax incentive program, Export Market Development Grant (EMDG), and other Australian Government funding programs, including the AusIndustry Accelerating Commercialisation grant program.