Companies with aggregated turnover of A$20 million or more receive a non-refundable offset of the corporate tax rate plus 8.5% where R&D intensity is up to 2%, or plus 16.5% above 2%. Intensity is the share of the company's spending that goes on R&D, and it rewards companies for which R&D is a large part of what they do. Small companies under the A$20 million threshold do not need it; their refundable premium is a flat 18.5 points.
Proposed changes from 1 July 2028, not yet law. Proposed from 1 July 2028, announced in the 2026-27 Budget (12 May 2026) and not yet legislated: a 4.5 percentage point increase in offset rates for core R&D; removal of supporting R&D activities from eligibility; intensity threshold reduced from 2 percent to 1.5 percent; refundable offset turnover threshold raised to A$50 million; minimum notional deductions raised from A$20,000 to A$50,000; maximum expenditure threshold raised from A$150 million to A$200 million; companies more than 10 years old no longer eligible for the refundable offset. Current rules apply until then.
What it is
| Element | Rule |
|---|---|
| Applies to | Non-refundable claimants: aggregated turnover of A$20 million or more |
| Formula | Notional deductions for the year divided by total expenses for the year |
| Tier 1 | The part of notional deductions up to 2% intensity: corporate tax rate plus 8.5 points |
| Tier 2 | The part above 2% intensity: corporate tax rate plus 16.5 points |
| Marginal | The tiers apply to slices of expenditure, not to the whole amount |
| Total expenses | The expenses figure in the company's financial statements for the year, which includes the R&D expenditure itself |
| Legislated from | Income years starting on or after 1 July 2021 |
Who it applies to
Every company claiming the non-refundable offset. Intensity is calculated for the claimant entity, which for a consolidated group is the head company using the group's consolidated expenses, so a research-heavy subsidiary inside a large group is measured against the group's total spending. Companies whose R&D is a small fraction of a large cost base, such as miners, retailers and banks, sit in tier 1; companies built around R&D, such as larger biotechs and technology companies, reach tier 2 for most of their spend.
How it works
- Total the notional deductions for the year, capped at A$150 million for premium purposes.
- Take total expenses from the accounts for the same year.
- Calculate the tier 1 cap: 2% of total expenses.
- Notional deductions up to the cap receive the corporate tax rate plus 8.5 points; the remainder receives the corporate tax rate plus 16.5 points.
- Add the two amounts to give the offset; apply against tax payable and carry any excess forward.
What goes into total expenses. The figure is the accounting one: cost of sales, operating expenses, depreciation, impairments and finance costs as reported in the profit and loss statement and transferred to the tax return. It is not taxable deductions, so timing differences between accounting and tax do not affect it, but accounting choices do. A company that capitalises development costs reports lower expenses, and therefore higher intensity, than one that expenses them, while the notional deductions are the same either way.
Planning points. Intensity is measured once a year on the whole entity, so the practical levers are few: making sure every eligible activity is registered so the numerator is complete, applying consistent apportionment methods year to year, and understanding before year end which tier the company will fall into so that the offset can be forecast. Companies close to the 2% line should model the effect of large non-R&D costs, such as an acquisition or a restructuring charge, on the year's ratio.
Because total expenses include the R&D spend, increasing R&D raises intensity more slowly than the raw ratio suggests, and because the test is annual, a one-off cost such as a write-down can push a company out of tier 2 for a year. Timing of expenditure recognition and the apportionment basis for shared costs both move the ratio, so the calculation deserves the same care as the notional deductions themselves.
Worked example
Illustrative example. Nullarbor Minerals Ltd, a hypothetical company taxed at 30% with aggregated turnover of A$400 million, has total expenses of A$300 million and notional deductions of A$12 million, an intensity of 4%.
| Step | Calculation | Amount |
|---|---|---|
| Tier 1 cap | 2% of A$300 million | A$6,000,000 |
| Tier 1 offset | A$6,000,000 at 38.5% | A$2,310,000 |
| Tier 2 offset | A$6,000,000 at 46.5% | A$2,790,000 |
| Total offset | A$5,100,000 | |
| Deduction forgone | A$12 million at 30% | A$3,600,000 |
| Net benefit | A$1,500,000 |
Had Nullarbor's notional deductions been A$5 million, intensity 1.67%, the whole amount would have sat in tier 1: an offset of A$1,925,000 and a net benefit of A$425,000. Compare a hypothetical Swan Therapeutics Ltd with total expenses of A$40 million and notional deductions of A$30 million: tier 1 covers only A$800,000, and A$29.2 million earns the 16.5 point premium, a net benefit of A$4.886 million.
Common questions
Does intensity matter for small companies? No. Under A$20 million aggregated turnover the refundable premium is 18.5 points regardless of intensity.
Which expenses figure do we use? The total expenses reported in the company tax return, taken from the accounts. The ATO instructions for the schedule specify the label.
Is the ratio measured on registered activities only? The numerator is notional deductions, which are by definition on registered activities; the denominator is all expenses.
Can a group restructure to raise intensity? Consolidated groups are measured at head company level, and the ATO looks at arrangements designed to shift expenses.
Does the A$150 million threshold interact with intensity? Yes. Notional deductions above A$150 million receive the corporate tax rate only, so the tiers are applied to the first A$150 million.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.