What is the R&D Tax Incentive?

The Federal Government recognises that in order for the Australian economy to achieve long term growth and remain competitive globally, Australian businesses must be motivated to develop innovative products and services that add significant economic value. 

To help foster this innovation, the government offers the Research and Development (R&D) Tax Incentive to assist businesses in managing the often costly process of innovation. The R&D Tax Incentive is overseen by AusIndustry in partnership with the Australian Taxation Office (ATO). 

Who is eligible for the R&D Tax Incentive?

As per the ATO website, entities are eligible if they satisfy any of the following:

  • incorporated under an Australian law
  • incorporated under a foreign law but you are an Australian resident for income tax purposes
  • incorporated under a foreign law and you are both:
    • a resident of a country with which Australia has a double tax agreement, with a definition of ‘permanent establishment’
    • carrying on business in Australia through a permanent establishment as defined in the double tax agreement.

You are not eligible for the R&D tax incentive if you are:

  • an individual 
  • a corporate limited partnership
  • an exempt entity (where your entire income is exempt from income tax).

Companies are also expected to have spent more than $20,000 on eligible research and development activities. 

What are eligible R&D activities?

Claimants must conduct at least one core R&D activity. Any supporting activities must be proven to be connected to the core activity. Core R&D activities are defined as activities that lead to results a competent professional could not determine with currently available information or knowledge. 

Outcomes of core R&D activities should be derived from a rigorous process underpinned by accepted principles of science. This process is expected to begin with a hypothesis and advance to an experiment incorporating observation and evaluation.

Records of all activities associated with a claim must be maintained as the activity is carried out, and produced when the claim is reviewed. These records must show:

  • how the results of the activity could not have been determined beforehand
  • how the activity followed a scientifically rigorous process
  • how the activity aims primarily to produce new knowledge
  • how any supporting activities directly connect to a core activity.

Any activities that constitute part of a claim, whether a core or supportive activity, must be registered with AusIndustry prior to a claim being made. 

What are you eligible for under the R&D Tax Incentive scheme?

In the 2020-21 federal budget, the government made several changes to the R&D Tax Incentive, which took effect on 1 July 2021, that have increased the benefits of the scheme. 

As it currently stands, companies will receive a percentage of their eligible expenditure for that financial year as a tax offset. Eligible expenses are capped at $150 million, beyond which the available tax offset is reduced to the company’s tax rate. Offsets are calculated as follows:

  • Companies with annual revenue below $20 million will receive a tax offset equal to their company tax rate + 18.5%. If the R&D Tax credit exceeds any tax debt, the difference is refunded in cash. 
  • Companies with annual revenue of $20 million or more will receive a non-refundable tax offset based on a two-tiered system that ties the rate of the offset to the company’s R&D intensity. The rates are calculated as the company’s tax rate plus: 
    • 8.5% for R&D expenditure up to 2% R&D intensity
    • 16.5% for any R&D expenditure above 2% R&D intensity.

For the purposes of the incentive program, R&D intensity is simply a company’s R&D expenditure as a percentage of its overall expenditure. 

The Federal Government is strictly enforcing eligibility criteria in its review process for the R&D Tax Incentive program, so any claims must be airtight to have a chance of being accepted. This need not be a concern, however, as Clearpoint Ventures is perfectly placed to assist you with your R&D Tax Claim.

Want to find out how Clearpoint Ventures can maximise your R&D Tax claim, simply? Contact us today for an obligation free discovery chat. 

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