How Much is the R&D Tax Incentive Worth?

One of the most commonly asked questions about the R&D Tax Incentive is how much an applicant will be able to claim. In truth, the answer depends on a number of factors, meaning it’s best to seek the advice of a specialist tax accountant. However, understanding the general rules and legislation that govern the Incentive will help you make an informed decision whether this program is right for your business.

What is the R&D Tax Incentive?

The Research and Development Tax Incentive is designed to help companies of all shapes and sizes conduct research and development activities that will enable their business to grow.

Oftentimes, these activities are exactly what is needed to help your company evolve and keep up with competitors. Unfortunately, many businesses — particularly small and medium sized enterprises — simply don’t have the budget to partake in R&D. The Tax Incentive is designed to remove this barrier by providing a tax offset, benefiting not only your business but the overall Australian economy.

How much is the R&D Tax Incentive worth?

From July 2021, the R&D Tax Incentive is based on a premium on top of your corporate tax rate.

For companies with an aggregated turnover of less than $20 million, the refundable R&D tax offset is your corporate tax rate plus an 18.5 percent premium.

For companies with an aggregated turnover of $20 million or more, the non-refundable R&D tax offset is your corporate tax rate plus an incremental premium based on your ‘R&D intensity,’ which is a percentage of your eligible R&D expenditure as proportion of your total expenditure for the year.

Therefore, the answer to the question ‘how much is the R&D Tax Incentive worth’ is really dependent on a number of factors, including your annual turnover. For a more tailored response, speak to a tax accountant who specialises in this field.

How does the incentive work?

The incentive is what is known as a self-assessment program. It requires a fair bit of work on the part of the business — or their team of tax accountants.

You must start by determining whether your company is eligible for the incentive — more information on eligibility requirements below. Secondly, it is up to you to determine whether your research and development activities also meet eligibility requirements.

Finally, it is up to you to keep appropriate records to substantiate your claims. These records will be submitted with your tax return come the end of the financial year. Unless you’ve gathered appropriate evidence to corroborate your spending, you may not receive the offset you are expecting.

Am I eligible for the R&D Tax Incentive?

The vast majority of companies operating in Australia will be eligible for the program. However, it’s well worth checking that you can claim the offset before spending significant amounts of money on research and development!

You will be eligible for the R&D Tax Incentive if you are a corporation as per any of the following definitions:

  • You are incorporated under Australian law.
  • You are incorporated under foreign law but are an Australian resident for income tax purposes.
  • You are incorporated under foreign law and are both:
    • A resident of a country with which Australia has a double tax agreement that includes a definition of ‘permanent establishment’
    • Carrying on business in Australia through a permanent establishment as defined in the double tax agreement.

There are additional rules that apply to consolidated groups and R&D partnerships.

It can also help to look at companies that do not meet eligibility requirements. You will not be eligible for the incentive if:

  • You are an individual
  • You are a corporate limited partnership
  • You are an exempt entity (eg. your entire income is exempt from income tax)
  • You are a trust (excluding a public trading trust with a corporate trustee)

What defines an eligible research and development activity?

The exact definition of a research and development activity can be found in the Income Tax Assessment Act 1997. The Australian Government has also put together a handy guide to help businesses determine whether their planned research and development activities are eligible and what category they fall under — core or supporting.

However, for personalised advice, it’s highly recommended you seek out the guidance of an experienced tax accountant. Not only will they be able to confirm whether your company and activities are eligible for the scheme. They can also help set up record keeping systems and provide guidance on your tax obligations to ensure you are maximising your return.

For more information, contact a team of tax accountants today.