The R&D Tax Incentive is one of the major levers to encourage Australian organisations to innovate.

The R&D Tax Incentive allows Australian companies to obtain refundable tax offsets and/or non-refundable tax credits for expenditure related to research and development.

R&D is work undertaken in a systematic, investigative and experimental way that involves innovation or technical risk, and are undertaken to develop new knowledge to create new products, processes or services. Other offsets and concessions can also be applicable in some cases.

International Technology Group will help you determine if your company qualifies for the R&D Tax Incentive by evaluating the following:

1. Project’s technical description and activities

2. Company’s structure

3. Statutory interpretation

4. Financial expenditure and

5. Record-keeping

Eligible R&D entities:

• incorporated under an Australian law

• incorporated under a foreign law but an Australian resident for income tax purposes

• incorporated under a foreign law and you 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.

If you’re an R&D entity, you may also need to consider the special rules applied to consolidated groups and R&D partnerships.

Ineligible R&D entities:

• an individual

• a corporate limited partnership

• an exempt entity (where your entire income is exempt from income tax)

• a trust (except for a public trading trust with a corporate trustee).

Eligible R&D activities are described as either core or supporting activities.

Core activities are those:

1. Whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that;

   1. Is based on principles of established science, and

   2. Proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions, and

2. That are conducted for the purpose of acquiring new knowledge (including knowledge or information concerning the creation of new or improved materials, products, devices, processes or services).

Supporting activities are those that are directly related to core activities or are undertaken for the dominant purpose of supporting the core activities.

This is a crucial definition and we are here to help you understand how your development work may comply.

The RDTI provides a benefit to your company by way of a refundable tax credit or non-refundable tax credit depending on your annual aggregated turnover.

Companies that have an annual aggregated group turnover of less than AUD $20 million, the potential benefit is a refundable tax credit of 18.5% up to 48.5%. The benefit depends on the company's assessable income, annual profit/loss figure, and tax rate.

When your company is in a loss position, you carry forward the accumulated losses that are used to offset future profits. The RDTI allows you to ‘unlock’ those losses at a rate of 43.5% (for base rate entities that apply a 25% tax rate) or 48.5% (for non-base rate entities that apply a 30% tax rate) rather than carrying the loss forward into future.

Where your company is in a profit position, you receive a non-refundable tax credit that in turn reduces your tax payable.

Example #1: A base rate entity (25% tax rate) with a $700,000 loss and $500,000 R&D Expenditure.

Accounting profit / (loss) $(700,000)

Add back R&D expense $500,000

Taxable income / (loss) $(200,000)

Tax on taxable income $0

Refundable Tax offset $217,500

Tax Payable/(Refundable) $(217,500)

If No R&D, Tax Payable $0

Immediate benefit (43.5%) $217,500

In example #1, without claiming RDTI the company would carry forward a $700,000 loss. By claiming $500,000 of R&D expenditure, that company could receive $217,500 cash refund for the financial year and carry forward a $200,000 loss.

Example #2: A base rate entity (25% tax rate) with a $850,000 profit and $1,200,000 R&D Expenditure

Accounting profit / (loss) $850,000

Add back R&D expense $1,200,000

Taxable income / (loss) $2,050,000

Tax on taxable income $512,500

Refundable Tax offset $522,000

Tax Payable/(Refundable) $(9,500)

If No R&D, Tax Payable $212,500

Immediate benefit (18.5%) $222,000

In example #2, without claiming RDTI the company would be required to pay $212,500 in taxes. By claiming $1,200,000 of R&D expenditure, that company could receive $9,500 cash refund for the financial year and $0.00 tax payable.

Example #3: A base rate entity (25% tax rate) with a $5,000,000 profit and $2,000,000 R&D Expenditure

Accounting profit / (loss) $5,000,000

Add back R&D expense $2,000,000

Taxable income / (loss) $7,000,000

Tax on taxable income $1,750,000

Refundable Tax offset $870,000

Tax Payable/(Refundable) $880,000

If No R&D, Tax Payable $1,250,000

Immediate benefit (18.5%) $370,000

In example #3, without claiming RDTI the company would be required to pay $1,250,000 in taxes. By claiming $2,000,000 of R&D expenditure, that company could receive $370,000 non-refundable tax credit for the financial. This company would have $880,000 tax payable remaining.