The notional deduction rules are generous in scope, and Division 355 balances that with adjustments that stop the offset being claimed on money that has not left the group, on materials that became saleable product, or on spending a government has already funded. Three adjustments do most of the work: the associate payment rule, the feedstock adjustment and the clawback adjustment. Each is easy to miss and each is a standard item in ATO reviews.
What it is
| Adjustment | Trigger | Effect | Statute |
|---|---|---|---|
| Associates | Expenditure incurred to an associate of the R&D entity, such as a related company, a controlling shareholder or a director's entity | Notionally deductible only in the income year it is paid | Section 355-480 |
| Feedstock | Feedstock inputs, being goods, materials or energy transformed or processed in R&D activities, produce feedstock output that is sold or applied to the company's own use | Where R&D activities produce marketable products, a feedstock adjustment adds an amount to assessable income that reduces the benefit on the feedstock inputs used | Subdivision 355-H |
| Clawback | A recoupment from an Australian government, such as a grant or reimbursement, relating to expenditure that was notionally deducted | A clawback adjustment: an amount is included in assessable income so that the net benefit of the offset on the funded expenditure is removed | Subdivision 355-G |
| Balancing adjustment | Disposal of an asset on which decline in value was notionally deducted | Adjustment to assessable income or a further notional deduction | Section 355-315 |
Who it applies to
Associates. Any company that pays a related party for R&D work or inputs: a parent that charges management or engineering fees, a sister company that supplies staff, a director who invoices through a consultancy. The definition of associate follows the general tax definition and is wide. Accruing a related-party charge at year end and paying it in the next year defers the notional deduction to the next year.
Feedstock. Manufacturers, food and agriculture businesses, miners and anyone whose trials produce something that is sold or used. Energy consumed in the process counts as a feedstock input; labour does not.
Clawback. Any company with a Commonwealth, state or territory grant for the same work, including matched-funding programs. The adjustment applies in the year the recoupment is received, which may be after the offset year.
How it works
Associates. At year end, list every R&D cost owed to an associate and check whether it was paid, in cash or by an accepted constructive payment, by 30 June. Unpaid amounts come out of this year's notional deductions and go into next year's, when paid.
Feedstock. For each activity that produced marketable products: identify the feedstock input expenditure notionally deducted and the feedstock revenue from the output, calculate the feedstock adjustment under Subdivision 355-H, and include it in assessable income in the year the output is sold or applied. The adjustment reduces the benefit on the feedstock inputs; it does not affect the eligibility of the activity.
Clawback. When a recoupment is received, calculate the clawback amount under the statutory formula, which depends on the recoupment, the expenditure it relates to and the offset rate, and include it in assessable income for that year. The practical effect is that the company keeps the grant but loses the offset premium on the grant-funded portion.
Worked example
Illustrative example. Eyre Metals Pty Ltd, a hypothetical company, trials a new smelting process in 2025-26.
| Item | Facts | Treatment |
|---|---|---|
| Engineering fees from its parent company | A$200,000 invoiced in June 2026, paid in September 2026 | Not notionally deductible in 2025-26; deductible in 2026-27 when paid |
| Ore and power consumed in trial smelts | A$300,000 notionally deducted; 400 tonnes of trial metal sold for A$450,000 | Feedstock adjustment: an amount added to assessable income in the year of sale, reducing the benefit on the A$300,000 of ore and power used |
| State government grant | A$150,000 received in 2026-27 for the smelting trial | Clawback adjustment in 2026-27 under the statutory formula, removing the premium on A$150,000 of expenditure |
| Trial furnace | Decline in value A$60,000 notionally deducted; furnace sold in 2027 | Balancing adjustment on sale |
Without the adjustments, Eyre would have claimed the offset on money its own parent was still owed, on ore that became saleable metal and on expenditure the state had paid for. With them, the claim stands up to review.
Common questions
We paid the associate by journal entry against a loan account. Does that count? Constructive payment can count where the amount is applied or dealt with on the associate's behalf, but the ATO looks closely at year-end journals; cash is safer.
Is scrap sold from trials feedstock revenue? Yes, if the output is sold, even as scrap. The adjustment reflects the feedstock inputs used, so it should be calculated whenever trial output is sold.
Do R&D grants make the project ineligible? No. The activities remain eligible; the clawback removes the premium on the funded expenditure.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.