Accounting automation

Guide to research and development tax incentives in Australia

Apr 05, 2024

R&D activities are crucial for businesses to replace inefficient products and practices and stay competitive. But not every business has the funds to carry them through.

On a mission to support them, the Australian government is providing research and development tax incentives.

By making use of research and development tax deductions and incentives, businesses can bring the R&D team into being and contribute to the well-being of the Australian economy.

Overview of research and development tax incentive in Australia

R&D tax incentives are a boon to Australian businesses that are trying to develop new products. Basically, the government lets you gain back up to 45% of the R&D spending. 

The Australian Taxation Office has a designated set of requirements that companies must meet to be eligible for this funding. Also, research and development incentives are only for certain R&D activities only.

It’s motto is to support businesses in trying out new innovations that benefit themselves as well as the country.

Who should apply for the research and development tax incentive?

Not all Australian businesses are eligible for research and development tax incentive in Australia. To be eligible for applying for the research and development tax credit, the following criteria must be met.

• Must have incorporated in Australia.

• Must conduct or have plans to conduct R&D activities in the current year.

• The R&D expenses of the company must be higher than AUD 20,000. Even if the expenses are lower than AUD 20,000, you can still claim a tax write-off through a registered RSP.

What is research and development tax incentive in Australia?

 Effective from July 1, 2021, Eligible Australian companies can receive a tax offset from the Australian government. Eligible companies are split into two categories based on their turnover.

If the aggravated turnover of an Australian company is lesser than AUD 20 million per year.

Then the refundable R&D tax offset will be an 18.5% premium along with the corporate tax rate. If the aggravated turnover of the Australian company is higher than AUD 20 million or higher than that.

The non-refundable R&D tax offset will be equivalent to your corporate tax rates. There will be additional incremental premiums, too, depending on the intensity of the R&D projects.

R&D intensity up to 2% will be given an incentive premium of 8.5%, along with the corporate rate tax rate offset. For intensity above 2%, the incentive percentage will be 16.5%.

Suggested read: Complete guide to GST in Australia

Which are eligible and non-eligible R&D activities?

Under the Income tax assessment act of 1997, the following R&D activities are eligible for research and development tax incentives. Before we get into that, you should know the difference between R&D projects and R&D activities.

Each R&D project will be performed through a series of steps which are R&D activities.

Eligible R&D activities include

• The outcome of the R&D activity cannot be concluded from current resources or knowledge base but only be determined through extensive and systematic research.

• The research work must be based on predetermined scientific principles.

• The research work shouldn’t be in plain format. It should start with a hypothesis and end with a proper conclusion after explaining the experiment and evaluation steps in detail.

Non-eligible R&D activities include

• Product market research, competitor research, promotion activities.

• Studies and surveys conducted by the management.

• Development and enhancement of new computer software for internal use or as affiliate work.

• Activities related to the work done by the company to maintain or comply with statutory regulations of government bodies.

• Obtaining patents and commercial licenses.

• Testing and surveying natural bodies, identifying natural deposits and their depth, and studying deposits and fossils (in the case of minerals and petroleum industry).

• Social science, humanity, or arts research is conducted for product development.

Interesting read - Definitive guide to what is open banking in Australia

How to apply for the tax incentive program in Australia?

If your R&D activities are eligible for ATO research and development tax incentives, follow these steps to get started and start applying for the annual research and development tax credit. 

1. Self-assess eligibility

Check whether your organization and the R&D activities you conduct are eligible for this program. You can also check the previous years’ documentation and records to support your assessment.

2. Applying for overseas finding

If your R&D activities also include overseas expenses or activities, you can apply for overseas findings in the ATO portal.

Any Australian project that has overseas expenses related to a core or a supporting R&D activity is also eligible for research and development tax deductions.

This is only possible if you don’t have the required facilities and infrastructure available in Australia. 

Getting a positive result in this will help you recover the R&D expenditure spent overseas. This application must be submitted before the end of the income year. 

Suggested read: What is market penetration pricing strategy for businesses?

3. Conduct Research & development

Start your R&D activities while continuing with self-assessment on the side. You must also keep records of your R&D activity as ATO might request them anytime. 

4. Register for the program

Once the self-assessment is met and the R&D project is initiated, register for the R&D program here in the customer portal with the help of MyGov ID. In order to log in there, you should have linked your company’s ABN number.

As this is an annual process, you have to apply for the research and development tax incentive every year. In this portal, you can also check updates and statuses of your application. You can receive deadline notifications as well.

Someone from your company who is responsible for the application process can be nominated as an authorization administrator. 

5. Claim the tax offset

Now you can claim the research and development tax deduction during the annual tax return session. Under the R&D schedule, you can mention your registration number.  

Investing in R&D activities is important for any business as it gives birth to new inventions. There are certain industries where you cannot grow further without driving R&D activities.

Fortunately, businesses in Australia can claim research and development tax offset for eligible core and supporting R&D activities. Conduct a strong self-assessment before you proceed with the application process, and keep note of the deadlines.

Suggested read: All you need to know about small business grants in Australia


Are R&D grants taxable in Australia?

If it’s an eligible R&D activity with less than 2% intensity, it will receive a non-refundable tax offset equal to the corporate tax amount and an 8.5% incentive premium.

Does market research count as R&D?

No. Market research doesn’t count as an R&D activity and is not qualified for research and development tax offset. 

Can a sole trader claim R&D tax incentive?

Sole traders are not eligible for research and development tax incentives by the Australian government.

What are the five criteria identifying R&D?

Few of the criteria to tell whether your R&D task is eligible for the incentive or not,

• Experimental activities are conducted based on scientific principles and research.

• Research carried out to build a new knowledge base.

• Should have everything from hypothesis to findings to conclusion

Scale your R&D business with an interest-free credit line