Innovation is at the heart of progress. The Australian government has recognised that research and development (R&D) is a crucial part of keeping the country at the forefront of innovation. Innovative activities lead to job creation, economic growth, and an overall enhancement in the quality of life for Australians.
For several years the Australian government has incentivised Australian companies to invest in new or novel ideas by conducting R&D. Such investments have the potential to provide significant benefits through the development of new technologies, products, services, or ideas.
One of the mechanisms that the Australian government uses to encourage investment in R&D activities is via the taxation system.
What is the Research and Development Tax Incentive?
The Australian Taxation Office (ATO) provides incentives to increase the amount of R&D taking place across the Australian economy, such as the research and development tax incentive.
The R&D tax incentive offers, in some circumstances, a refundable tax offset for eligible R&D activities. Companies that invest in eligible R&D activities can claim a refundable tax offset in their company tax return, which can result in a significant reduction of their tax liability or, in some cases, a refund.
The rules and regulations for the R&D Tax Incentive often change and it is recommended to check the current requirements that are posted on the Australian Taxation Office website.
How the Research and Development Tax Incentive Works
The rate of the R&D tax incentive available is different for Base Rate Entities (companies with an annual turnover of less than $20 million) and for larger companies (with an annual turnover of more than $20 million).
How to claim
To claim the R&D Tax Incentive, companies must register their eligible R&D activities with AusIndustry (which is part of the Department of Industry, Science and Resources) before lodging their company tax return with the ATO. The administration of the R&D Tax Incentive is split between AusIndustry which handles the registration of R&D activities, and the ATO which reviews and potentially audits R&D claims in company tax returns.
There is a distinction between Core R&D Activities and Supporting R&D Activities. The key requirements for Core R&D Activities are that they must be experimental activities:
- whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience;
- which can only be determined by applying a systematic progression of work that;
- is based on principles of established science;
- proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and
- that are conducted for the purpose of generating new knowledge (including creating new knowledge or improved materials, products, devices, processes or services).
Note that new knowledge refers to new for the industry globally, and does not mean just being new to that company. This is why researching what knowledge the industry has already developed is a key step in any successful R&D claim.
Some types of activities are specifically excluded from being core R&D activities. The excluded activities include, for example, market research such as consumer surveys, management studies or surveys, research in social sciences, arts or humanities, or the commercial, legal, and administrative aspects of patenting or licensing, among others.
Supporting R&D Activities are those that are directly related to Core R&D Activities, or for certain activities, those that have been undertaken for the dominant purpose of supporting Core R&D Activities.
The total notional deductions claimed for an income year must meet a minimum threshold. There are many more key requirements and exceptions involved in the R&D Tax Incentive that we have not expanded upon here.
Income tax in Australia is based on a self-assessment system. Similarly, the R&D Tax Incentive is, at the outset, the responsibility of the claimant companies to determine their eligibility and the amount of their claim.
The R&D Tax Incentive is a lucrative tax deduction only available to Australian companies in specific circumstances. Not all activities are eligible to be classified as eligible R&D activities, and key requirements must be met in order for a claim to be successful.
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