1. Knowledge Base

How the R&D Tax incentive works (Australia)

Claiming the R&D Tax Incentive is a two stage process. Here's how it works.

đź’ˇRemember you must submit any claims by 30 April for the previous financial year

The two stages are:

  1. Describing your R&D project/s in a registration submitted to AusIndustry
  2. Claiming your eligible R&D expenses in a schedule as part of your tax return lodged with the Australian Taxation Office (ATO)
You need you to keep records regarding both of these stages.

What does eligibility involve? 

You are likely to be eligible if you:

  • Are a company developing a unique, non-trivial software, hardware, engineered or manufactured product, process or service (i.e. it’s not just for software companies)
  • Can describe this as a series of experiments with unknown outcomes from which you have learned as you’ve progressed these developments
  • Have at least $20K of eligible expenses on R&D from the prior financial year

Eligible expenses include:

  • Salaries of staff involved in R&D
  • Contractors involved in R&D and working inside Australia
  • Costs of equipment and operations related to R&D
  • Other direct costs such as R&D-related travel
  • Some indirect costs such as rent and utilities
  • Depreciation of assets used for R&D

Ineligible expenses include:

  • Salaries of staff not involved in R&D
  • Contractors not involved in R&D or working outside Australia
  • Costs of equipment and operations not related to R&D
  • Legal and accounting costs
  • Marketing or advertising costs
  • Expenses on R&D from this financial year

How do you get the money?

Accessing the refund is two-step process:

    1. You need to describe your core and supporting R&D activities as a series of experiments in a registration to AusIndustry; this will typically be approved by the Industry Innovation and Science Australia (IISA) board, but might be scrutinised by AusIndustry reviewers at some later date. Startup savvy R&D tax experts like Standard Ledger have lots of experience in preparing these registrations.
    2. A summary of the eligible R&D spend is included as an R&D tax schedule in your tax return lodged with the ATO; this might be scrutinised by ATO auditors. Startup savvy tax agents like Standard Ledger have lots of experience in preparing these schedules.

If you’re an early-stage startup (under $20 million turnover), the R&D tax incentive is technically a refundable tax offset, meaning you can effectively cash out any tax losses rather than carrying them forward.

  • If you’re not yet profitable, and have enough tax losses, you will receive a 43.5% cash refund from the ATO. You can expect the ATO to clear your refund in four to eight weeks after lodging your tax return.
  • If you’re already profitable, and in a tax payable position, your R&D claim will reduce the tax that you’d otherwise be paying, but be aware that the benefit is a 16% one (the difference between the 43.5% R&D offset and small business company tax rate of 27.5% … yep it can get a bit technical!)

If you're a typical early stage startup in pre-revenue development mode, and have not made a profit, on a $100,000 R&D spend the maths looks like this:

Your R&D spend $100,000
You claim 43.5% $43,500
LESS preparation fee $3,500
Your net benefit $40,000

Record keeping

In the current climate of increasing audits, you want to make sure your records are up to scratch.

  • For financial records, make sure you’re able to provide any underlying payroll details or copies of external contractor services you’ve used for R&D, for example. As part of Standard Ledger’s ongoing bookkeeping services we include the Receipt Bank App/email to “Snap n Send” your source invoices; you’ll be ready with full documentation should you be faced with an ATO audit.
  • For evidence of R&D activities, you’re going to need to show how you identified and tracked the eligible R&D activities (as well as the basis under which those records have been used to determine the associated R&D spend).
AusIndustry uses a wonderful phrase, contemporaneous records(!), to describe the documentation you should keep as you carry out your R&D activities. It means: In real time. We think that a check-in or two along the way during the year makes a lot of sense — call it insurance if you like — which is why we also suggest an (optional, additional) documentation review service if you’re doing R&D.