Australia's R&D Tax Incentive gives companies a tax offset for eligible R&D expenditure. It is jointly administered by the Department of Industry, Science and Resources, on behalf of Industry Innovation and Science Australia, and the Australian Taxation Office. Eligibility has three parts: the company must be an R&D entity, the activities must be core or supporting R&D activities as Division 355 of the Income Tax Assessment Act 1997 defines them, and the activities must be registered with the department before the offset is claimed. This page covers the first two; the registration page covers the third.
Who can claim
Corporations incorporated in Australia, foreign corporations that are Australian residents for tax purposes, and some foreign corporations carrying on business through a permanent establishment in Australia. You must spend at least A$20,000 on eligible R&D in the income year, unless you use a research service provider or contribute to the Cooperative Research Centres Program. The law calls a company that passes these tests an R&D entity.
| Test | Rule | Notes |
|---|---|---|
| Entity type | Body corporate: Australian company, resident foreign company, or foreign company with an Australian permanent establishment | Trusts, partnerships, sole traders and tax-exempt bodies cannot claim |
| Minimum spend | At least A$20,000 of notional deductions in the income year | Waived where the R&D is done by a registered research service provider or is a CRC contribution |
| Registration | Activities registered with the department within 10 months of the end of the income year | Every year, before the claim |
| Location | Activities conducted in Australia, or overseas with an Overseas Finding | See below |
| Who benefits | The R&D entity that incurs the expenditure on its own behalf | Work done for another entity, or funded by it, is generally claimed by that entity |
What counts as R&D
Core R&D activities are experimental activities whose outcome cannot be known in advance from current knowledge. They follow a systematic progression of work, from hypothesis to experiment, observation and evaluation, leading to logical conclusions, and are conducted to generate new knowledge. Supporting R&D activities are directly related to a core activity, and some must also be undertaken for the dominant purpose of supporting it. Three points in the definition decide most cases.
- Unknown outcome. The outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, and can only be determined by applying a systematic progression of work based on established science. The test is what a competent professional in the field could know, not what the company knew.
- New knowledge. The activity is conducted for the purpose of generating new knowledge, including knowledge in the form of new or improved materials, products, devices, processes or services.
- Dominant purpose for some supporting activities. A supporting activity that produces goods or services, or is directly related to producing them, or is one of the excluded activities, counts only if it is undertaken for the dominant purpose of supporting a core activity.
The department's Guide to Interpretation asks claimants to register activities, not projects: each core activity should describe its hypothesis, the experiment that tests it, how results are observed and evaluated and what conclusion was reached, and each supporting activity should say which core activity it supports. The core and supporting activities page works through the distinction.
Activities that do not qualify
Division 355 lists activities that cannot be core R&D activities, whatever their novelty. They can still be supporting activities if the dominant purpose test is met.
| Excluded from core activities | Why it matters |
|---|---|
| Market research, market testing and development, sales promotion | Commercial, not scientific, uncertainty |
| Prospecting, exploring or drilling for minerals or petroleum | Mining exploration is excluded even where techniques are new; developing a new technique can still qualify |
| Management studies and efficiency surveys | Business process work |
| Research in social sciences, arts or humanities | Outside the fields of science covered |
| Commercial, legal and administrative aspects of patenting, licensing and similar | Protecting the result is not generating knowledge |
| Complying with statutory requirements or standards | Testing for compliance alone is excluded; experiments to find out how to comply may qualify |
| Reproducing a commercial product or process from examination, plans or public information | Nothing new is learned |
| Software for the internal administration of the company's own business functions | The main exclusion in software claims; see the industries page |
Where the work is done
The offset is for activities conducted in Australia. An activity conducted overseas counts only if the department has issued an Overseas Finding for it, which requires among other things that the activity has a significant scientific link to core activities conducted in Australia, cannot be conducted in Australia, and that the overseas spend is less than the Australian spend across the project. The findings page explains the application. Expenditure on an activity conducted in Australia for a foreign related entity can qualify where the Australian company is the R&D entity and the conditions for R&D conducted for a foreign resident are met.
Illustrative example
Illustrative example. Kirra Materials Pty Ltd, a hypothetical Australian company with aggregated turnover of A$8 million, is developing a recycled-polymer composite for marine decking. It does not know whether the composite can reach the required flexural strength without a virgin-polymer binder, and the published literature does not say. It frames a hypothesis, runs batches at different binder ratios, tests them and records the results: a core R&D activity. Producing the test panels, and designing the moulds for them, are supporting activities. The marketing survey of boat builders and the application for a product standard certificate are excluded. Kirra registers two core and two supporting activities for the year, spends A$420,000 on them and, because its turnover is under A$20 million, claims the refundable offset.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.