The Australian scheme works through notional deductions. Expenditure on registered R&D activities is not deducted in the ordinary way; instead the company is treated as entitled to a notional deduction, and the tax offset is calculated as a percentage of those notional deductions. The categories are broad, covering most costs incurred on the activities, but the law carves out several items and adjusts others. The tax offset is for R&D expenditure of up to A$150 million a year.
Cost categories that qualify
| Category | What is included | Basis |
|---|---|---|
| Expenditure on R&D activities | Salaries and wages, superannuation, contractor fees, consumables and other costs incurred on registered activities, to the extent they relate to those activities | Notional deduction in the year incurred |
| Decline in value of depreciating assets | The decline in value of tangible assets used for R&D activities, to the extent of that use | Notional deduction under the ordinary capital allowance rules |
| Research service providers | Payments to a registered research service provider for R&D activities | Notional deduction; the A$20,000 minimum does not apply |
| Cooperative Research Centre contributions | Monetary contributions under the CRC Program | Notional deduction |
| Balancing adjustments | Where an R&D asset is disposed of | Separate notional deduction or assessable amount |
Staff and time
Salaries, wages, bonuses, superannuation contributions, payroll tax, workers' compensation premiums and leave entitlements of staff working on registered activities are expenditure on those activities, apportioned where an employee divides time between R&D and other work. The ATO expects a reasonable, documented basis for the apportionment, such as timesheets, project records or a considered estimate backed by evidence. Directors' fees qualify on the same basis. Employee costs for work overseas are excluded unless an Overseas Finding covers the activity. Recruitment costs, training and general staff welfare are not expenditure on the activities unless the training was itself needed to conduct an experiment, and even then the department expects it to be registered as a supporting activity.
Contractors who are in substance employees, such as labour-hire staff working under the company's direction, are treated as contractor expenditure rather than salary, which changes nothing in the amount but matters for the associate rule if the labour-hire entity is related.
Contractors and subcontracted work
Payments to contractors for conducting registered activities qualify in full; there is no percentage haircut as in the UK. Two rules change the timing and the amount:
- Associates. Expenditure incurred to an associate, such as a related company or a director's company, is notionally deductible only in the year it is paid, not when incurred. The associates and feedstock page covers this.
- Research service providers. Payments to a provider registered with the department count towards eligibility without the A$20,000 minimum.
Where a contractor does R&D for your company, your company is the R&D entity and registers the activities; the contractor does not. The contract should show that your company bears the financial risk, controls the work and owns the results.
Materials, software and overheads
Consumables and materials used in experiments qualify. 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.
Software, cloud and licences used in conducting the activities are expenditure on those activities, apportioned for other use. Software developed for internal administration is excluded as an activity, not as a cost: a licence for a data platform used to run the experiments qualifies, while a licence for the accounting system does not.
Overheads such as rent, utilities, insurance and administrative support qualify to the extent they relate to the R&D activities, which calls for a reasonable apportionment method, for example floor area for a laboratory or headcount for shared services.
Costs that are excluded
| Excluded | Treatment |
|---|---|
| Interest and borrowing costs | Not notionally deductible; deductible in the ordinary way |
| Expenditure on buildings | Excluded, including capital works and extensions |
| Core technology | Expenditure to acquire technology the R&D builds on is excluded |
| Cost of depreciating assets | Only the decline in value is deductible, not the purchase price |
| Expenditure above A$150 million | Offset at the company tax rate only, so no premium |
| Expenditure not at risk | Amounts the company is certain to recover regardless of the outcome are excluded |
| Government recoupments | Grants for the same expenditure trigger a clawback adjustment; see the associates and feedstock page |
Illustrative example
Illustrative example. Tarkine Robotics Pty Ltd, a hypothetical company with a 30 June year end, registers one core and two supporting activities. Its costs for the year:
| Cost | Amount | Notional deduction |
|---|---|---|
| Four engineers, 60% of time on the activities, salaries and superannuation A$600,000 | A$600,000 | A$360,000 |
| Unrelated test laboratory contract | A$90,000 | A$90,000 |
| Fees to a related company, invoiced in June, paid in August | A$50,000 | Nil this year; A$50,000 when paid |
| Sensors and materials consumed in trials | A$40,000 | A$40,000 |
| Decline in value of a test rig, used 100% for R&D | A$30,000 | A$30,000 |
| Rent, apportioned by floor area of the lab | A$120,000 | A$24,000 |
| Interest on the equipment loan | A$8,000 | Excluded |
| Total notional deductions | A$544,000 |
Tarkine's offset is calculated on A$544,000. The related-company fee is claimed next year, when it is paid.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.