R&D Tax Incentive – Eligibility Explained

If you are a company developing a new product, service or process in Australia, you may be eligible for a tax offset under the Research and Development (R&D) Tax Incentive.

The program is designed to boost competitiveness and improve productivity across the Australian economy through supporting innovation.

Eligible businesses can claim a tax offset for costs related to innovation – and because it is an entitlement program, you don’t have to compete with others for funds, you need only meet the criteria to qualify.

Who is eligible?

You may be an eligible R&D entity if you are any of the following:

• A company incorporated under an Australian law;
• An overseas company but an Australian resident for income tax purposes;
• An overseas company 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 double tax agreement.

In addition – to be an R&D entity you must also be carrying on eligible R&D activities (see below). If this is you, you can claim eligible R&D expenditure, which covers a range of expenses, or ‘notional deductions’, that have occurred in the relevant financial year and that are directly connected to the R&D activity.

What types of costs are eligible?

Here are some examples of the types of R&D costs that can be eligible expenditure:

• R&D staff salaries, including on-costs;
• Contractors and consultants engaged to assist in R&D activities;
• Overhead costs where related to R&D (rent, electricity etc);
• Plant leasing costs where related to R&D;
• Materials and consumables directly used for R&D;
• R&D ‘pretotyping’ and prototyping trial costs;
• Travel costs for R&D purposes;
• R&D project management, administration and support costs; and
• Monetary contributions under the CRC program.

What qualifies as eligible R&D activities?

There are 4 essential R&D ‘ingredients’ that your R&D activities must have to qualify for the tax offset. Activities must be considered:

• Experimental;
• To have outcomes that 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 based on established science and proceeds from hypothesis to logical conclusions;
• To generate new knowledge; and
• Evidenced by good project documentation.

The types of questions used to determine if you undertook eligible R&D activities might include:

• Did your spending go toward the development of new knowledge such as novel technology, service or processes?
• Did you face technical uncertainties about whether your development activities would achieve what they set out to do?
• Did you conduct your development activities in an experimental way including a process of testing, learning and modification?
• Did you keep contemporaneous records showing all of the above took place?

If you are an eligible business – and conducted R&D during the past financial year – the deadline for application  is 30 April. Get the most out of the tax incentive and increase your cash flow.

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Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.