R&D Tax Incentive: Do I qualify? What can I claim? How does it work?

The R&D tax incentive (RDTI) is a major source of funding for startups and SMEs. It’s an Australian government program, used by more than 10,000 companies each year. All up, it provides more than $1 billion of support for research and development activities annually.
The RDTI is reasonably simple in theory but not so much in practice. You might have seen it in the media over the last few years too, as proposed government changes have proven unpopular with many. Here, we’ll explain how the RDTI works and what you need to know if you’re considering claiming it.
Essentially, the RDTI can provide up to 43.5% of your annual R&D costs back through the tax process.
Let’s start with the admin side. The program is run by the Australian Taxation Office (ATO) and AusIndustry. It’s based on self-assessment, which means you need to decide if you’re eligible before applying. For many this means seeking advice from an RDTI service, especially with recent uncertainty around eligibility and some headlines about companies having to pay R&D refunds back.
Describing your R&D project/s and activities in an application lodged with AusIndustry within 10 months of the end of your financial year. It will typically be approved within a few weeks but might be scrutinised by reviewers then or later. Once approved, you’ll receive a registration number from AusIndustry via email (this doesn’t mean your claim is guaranteed – it just means you can submit it).
Summarising your eligible expenses in an R&D tax incentive schedule. Include your registration number and lodge the schedule with your annual company tax return.
For the 2019-20 and 2020-21 income years:
Generally, you must claim at least $20,000 of eligible annual expenses, and there is currently a $100 million cap on claims.
The ATO has a calculator for estimating your benefit and producing your R&D tax schedule.
This can depend on your tax position. For example, if your annual turnover is under $20 million, in 2020-21:
Both the ATO and AusIndustry have examples on their websites.
You should consider applying for the RDTI if you:
You know the saying, the devil is in the detail? Well, eligible costs and recordkeeping is where the RDTI gets a bit hellish.
In summary:
It’s important the problem you’re trying to solve through R&D is technical, not commercial in nature. Usually, R&D is required for testing if something is even possible, rather than simply testing if your customers would use it.
AusIndustry has more on eligibility here and so does the ATO here.
Even if your R&D is eligible, you still need to keep the following records that can prove it:
Record keeping is also essential to help you avoid future pain from an AusIndustry review or an ATO audit.
The number one rule about recordkeeping is actually more about planning: take time upfront to really consider if your project is eligible at a detailed activity level. Rather than assuming you can claim an entire project, you’ll need to consider only activities that have an unknown outcome that you’re trying to test.
Remember, once you receive your registration number from AusIndustry, it doesn’t mean your claim is approved or guaranteed. It simply means you can submit it.
Read more about RDTI record keeping on the AusIndustry and ATO websites.
Overseas companies (incorporated in another country) can claim the RDTI if their resident country has a double tax agreement with Australia and they are carrying out business here through a ‘permanent establishment’. This is definitely one for the RDTI savvy accountants.
If you’ve carried out R&D activities overseas, it’s possible to claim up to half the total cost. You need to have a positive Advance/Overseas Finding, which is basically a full registration that gets reviewed immediately. You need to apply for this before the end of the financial year in which the activities began.
Only companies can apply for the RDTI. However, if your company is in a joint venture or partnership, each company within that joint venture or partnership can apply on their own, for their portion of the R&D expenditure.
The law is set up to prevent companies from claiming R&D expenditure incurred on behalf of other entities, and to prevent claim duplication.
This can be a bit tricky sometimes. You can determine the extent that your company carried out the R&D activities by considering who:
Sometimes, shareholders contract R&D services into their own company. You might be able to claim such ‘expenditure to associates’ in some circumstances, as the ATO explains here.
It’s also worth knowing that there’s been a lot of FUD (fear, uncertainty and doubt) about the RDTI over the last few years. In particular, the government considered reducing the broad-based nature of the program.
In good news from the 2020-21 federal budget, that didn’t happen, although there were some subsequent RDTI reforms that will affect the tax offset available to companies.
Overall, this was mainly also good news, but there are continued calls from the startup sector and others to redesign the RDTI to make it simpler to access. Watch this space.
To learn more about eligible registrations, including the definitions of ‘experiment’, ‘hypothesis’ and ‘new knowledge’, download the guides and resources and other key documents from the AusIndustry website. The site also has sector guides that illustrate eligible core and supporting R&D activities through hypothetical customer stories, and more.
To learn more about eligible claims, including the required steps to claiming, go to the ATO website.