R&D tax incentive claims, prepared and documented before the ATO asks

For an eligible company with aggregated annual turnover below $20 million, the refundable R&D tax offset is the company's applicable tax rate plus 18.5 percentage points. At a 25% company tax rate, that is 43.5% of eligible R&D expenditure. Your company tax rate must be checked separately; being below $20 million does not automatically establish a 25% rate.

Aggregated turnover takes account of relevant connected entities and affiliates, including those overseas. The refundable offset is unavailable if one or more income-tax-exempt entities control the company under the relevant rules at any time during the income year. The non-refundable rules then apply instead.

The refundable offset reduces tax payable. An excess may be refunded, subject to applicable tax debts, adjustments and processing. It is not a guaranteed cash payment. The same expenditure is not also claimed as an ordinary tax deduction.

Example: An eligible company with a 25% tax rate has $200,000 of fully eligible R&D expenditure. Its offset is $87,000: $200,000 × 43.5%. This is the offset amount before any applicable adjustments, not a promise of an $87,000 cash refund.

R&D intensity compares eligible notional R&D deductions with total expenses calculated under the R&D rules. It is not a percentage of turnover. The higher rate applies only to expenditure in the upper band. The offset reduces tax payable; unused amounts may be carried forward subject to the applicable rules, rather than paid as cash.

Example: A company using the non-refundable offset has a 30% tax rate, $10 million in total expenses for R&D intensity purposes and $500,000 in fully eligible R&D expenditure. Its intensity is 5%. The first $200,000 receives a 38.5% offset ($77,000), and the remaining $300,000 receives a 46.5% offset ($139,500). The total offset is $216,500 before any applicable adjustments.

For either offset, eligible notional R&D deductions above $150 million receive an offset at the company tax rate, without the R&D premium. The examples assume all relevant eligibility conditions are satisfied.

An eligible R&D entity. Generally, this is a company incorporated in Australia. Certain foreign-incorporated companies also qualify if they are Australian tax residents, or satisfy the relevant treaty-residency and Australian permanent-establishment conditions.

Individuals, including sole traders, corporate limited partnerships and entities whose entire income is exempt from income tax do not qualify. Trusts generally cannot claim. A partnership does not claim itself; special rules may allow partners to claim where every partner is an R&D entity.

At least $20,000 of eligible expenditure measured under the notional-deduction rules is generally required for the income year. Below this amount, claims are limited to qualifying expenditure with a registered research service provider that is not an associate, within its registered research field, and qualifying monetary contributions under the Cooperative Research Centres program.

Activities must be registered for each income year claimed before the offset is claimed. The activities must also satisfy the rules about who the R&D is conducted for; contractual arrangements and financial risk matter.

Core R&D activities are experiments undertaken to generate new knowledge. Their outcome cannot be known or determined in advance using current knowledge, information or experience, even by a competent professional in the field. The outcome must be determined through a systematic progression of work based on established science: a hypothesis, experiments, observation, evaluation and logical conclusions.

New knowledge can concern new or improved materials, products, devices, processes or services. A product being new to your business, technically complex or commercially innovative does not, by itself, qualify. Eligibility is assessed for the specific activities, not automatically for an entire project.

Supporting R&D activities must be directly related to core R&D. Where an activity is excluded from core R&D, produces goods or services, or directly relates to their production, it must also be undertaken for the dominant purpose of supporting core R&D, subject to the special exclusions.

Market research and sales promotion are excluded from core R&D. Routine software configuration, integrations and ordinary testing generally do not meet the core tests. Software developed mainly for specified entities' internal administration is specifically excluded from core R&D. Using AI does not automatically make work eligible. Some activities can qualify as supporting R&D only if the supporting tests are met.

Special restrictions apply to gambling, tobacco and related activities, including relevant vaping and nicotine activities, for income years starting on or after 1 July 2025. Only narrowly defined sole-purpose harm-minimisation exceptions may qualify.

Salaries, contractors and cloud or testing costs may be claimable to the extent they relate to eligible activities and satisfy the expenditure rules. Mixed-use costs must be reasonably apportioned and supported by records. Associate payments, grants, reimbursements, feedstock and other adjustments require separate consideration.

Excluded expenditure includes interest, expenditure not at risk, core-technology acquisition costs, building acquisition or construction costs and amounts included in a depreciating asset's cost. Eligible decline in value of tangible assets used for R&D may instead be claimable. Amounts incurred to associates generally must be paid before they can be claimed under the R&D rules.

R&D is generally conducted in Australia. To claim eligible overseas activity costs, a positive overseas finding is generally required. Overseas activities must meet specific conditions; choosing a cheaper overseas supplier is not sufficient. Apply by the relevant income-year end, rather than waiting for the later registration deadline.