Steps for claiming R&D tax offset

Steps to help you work out if you are eligible for the R&D tax offset, how much you can claim and records to keep.

Claiming the R&D tax offset

If you are conducting R&D activities, you may be eligible to claim an R&D tax offset under the R&D tax incentive.

You should assess for yourself whether you, and the activities you are conducting, qualify for a claim under the R&D tax incentive. To help you do this, we have set out the 6 steps you need to take to work out if you can claim and, if so, how much. We have also provided a checklist.

Remember that you must keep accurate records. Not only does this make good business sense, it's also the law. If you plan on using a tax agent or R&D consultant to help you lodge your returns or complete your forms, you need to make sure they are registered.

Registering your R&D activities

If your company is an R&D entity and you want to claim an R&D tax offset in your company's tax return, you must first register your R&D activities with AusIndustry (who act on behalf of Industry Innovation and Science Australia).

Register your R&D activities:

• for every income year you want to claim the offset
• within 10 months of the end of your company's income year
• prior to claiming the R&D tax offset in your company tax return.

Research Service Providers (RSPs) must also register annually with AusIndustry.

You can find more information at Assess if your R&D activities are eligibleExternal Link.

Step 1 – Check that you meet the 4 initial eligibility requirements

There are 4 questions you must answer in order to work out if you meet the initial eligibility requirements and therefore qualify for an R&D tax incentive tax offset.

Before claiming the R&D tax offset you must ensure that the correct answer is 'yes' to all of the following questions:

Question 1: Are you an eligible R&D entity?

Only R&D entities (eligible entities) can claim a research and development (R&D) tax offset.

Question 2: Have you carried out eligible activities?

You can only claim an R&D tax offset if you have carried out eligible R&D activities in an income year.

Question 3: Have you registered your activities?

You must register each of your R&D activities with AusIndustry before you lodge your claim.

Question 4: Do your notional deductions qualify?

You need to work out whether your eligible notional R&D deductions are greater than $20,000.

If you can answer yes to all of these questions, then steps 2, 3 and 4 will help you work out which offset you can claim.

If you cannot answer 'yes' to all of these questions, you cannot claim the R&D tax offset.

Step 2 – Work out if you are controlled by any exempt entities

Once you've worked out that you meet the initial eligibility requirements, you will also need to work out if you are controlled by one or more exempt entities as this will affect which tax offset you can claim.

An exempt entity is an entity whose ordinary and statutory income is exempt from income tax; or is a Commonwealth entity that does not pay tax.

If you are controlled by one or more exempt entities, you cannot claim the refundable tax offset but you can claim the non-refundable tax offset instead. If this is the case, you don't need to take your aggregated turnover into account to work out which offset you can claim, and you can go to Step 4 – Work out which tax offset you can claim.

If you are not controlled by one or more exempt entities, you may be entitled to claim the refundable tax offset if your aggregated turnover is less than $20 million.

To work out if your company is controlled by one or more exempt entities, you will need to consider if one or more exempt entities, their affiliates or both have either:

• shares and other equity interests in your company that give them or their affiliates at least 50% of the voting power in your company
• the right to receive at least 50% of any income or capital your company distributes.

Step 3 – Calculate your aggregated turnover

If you aren't controlled by an exempt entity, you must work out your aggregated turnover to identify which tax offset you can claim.

The rules for calculating aggregated turnover are the same as those for the small business entity concessions.

Aggregated turnover is the sum of the following:

• your annual turnover for the income year
• the annual turnover of any entity connected with you, for that part of the income year that the entity is connected with you
• the annual turnover of any entity that is an affiliate of yours, for that part of the income year that the entity is affiliated with you.

Both Australian entities and foreign entities can be connected or affiliated with you. This means your aggregated turnover includes the annual turnover of both Australian and foreign entities for the period they are connected or affiliated with you. When you calculate aggregated turnover for an income year, do not include:

• the annual turnover of other entities for any period of time that the entities are either not connected with you or are not your affiliate
• amounts resulting from any dealings between you and your connected entities or affiliates for that part of the income year that each entity is connected or affiliated with you
• amounts resulting from any dealings between your connected entities or affiliates for that part of the income year that each entity is connected or affiliated with you.

Annual turnover

Your annual turnover is the total ordinary income you derive in the income year in the ordinary course of carrying on a business. This includes income on a worldwide basis. If you are not carrying on a business at any time during the income year, your annual turnover is nil.

If you are a partner in an R&D partnership at some time during an income year, then your aggregated turnover includes your proportion of the R&D partnership's annual turnover for that year.

Once you have calculated your annual turnover, you will need to calculate the annual turnover for each entity connected or affiliated with you.

Connected entities

To work out your aggregated turnover for the income year you also need to determine if there are any entities 'connected with you'.

You are connected with another entity if either:

• you control the other entity
• you are controlled by the other entity
• you and the other entity are controlled by the same third entity.

Both Australian and foreign entities can be connected entities.

You control a company if you, your affiliates, or you together with your affiliates have either:

• shares and other equity interests in the company that give you or your affiliates at least 40% of the voting power in the company (or both)
• the right to receive at least 40% of any income or capital the company distributes.

You control a partnership if you, your affiliates, or you together with your affiliates have the right to 40% or more of the partnership's net income or capital.

Different rules apply for a discretionary trust.

You may also be connected with another entity as a result of the indirect control test.

Your affiliates

You need to determine if there are any entities that are affiliates of yours in order to work out your aggregated turnover.

An individual or company is your affiliate if, in relation to the affairs of their business, they act, or could reasonably be expected to act, either:

• in accordance with your directions or wishes
• in concert with you.

Your affiliates can be Australian and foreign individuals and companies.

An individual or company is not your affiliate merely because of the nature of the business relationship you or the individual or company share.

You can read more about the grouping rules to work out whether your entity is:

• an R&D entity that meets the aggregated turnover threshold to qualify for the refundable tax offset, as this is calculated on a 'group' basis
• controlled by one or more exempt entities, again to see if it qualifies for the refundable tax offset.

Step 4 – Work out which tax offset you can claim

Once you have determined if you are controlled by any exempt entities, and calculated your aggregated turnover, you can work out which tax offset you can claim.

You can claim the non-refundable tax offset if you are controlled by any exempt entities as worked out at Step 2. You can also claim the non-refundable tax offset if your aggregated turnover worked out at Step 3 is $20 million or more.

You can claim the refundable tax offset if your aggregated turnover worked out at Step 3 is less than $20 million. You cannot claim the refundable offset if you are controlled by any exempt entities.

Step 5 – Calculate your tax offset

To work out the amount of your tax offset you need to work out the amount of your notional deductions and, if claiming the non-refundable tax offset, your total expenses for the income year.

Notional deductions

Your notional deductions are the amounts you can claim in working out your tax offset. It includes the R&D expenses that you can claim, decline in value on your R&D assets, and contributions made under the Cooperative Research Centres Program.

Total expenses

Your total expenses are worked out in accordance with accounting standards and commercially accepted accounting principles. The amount reported at Item 6 on the company’s tax return is likely to show this amount.

Total expense includes the notional deduction amount. If an amount of notional deduction is not otherwise included in an entity’s total expenses, an adjustment is made to include it.

Rules apply to prevent any double counting of amounts recognised at different times as notional deductions and total expenses.

Calculating the offset

Once you have worked out which offset you are eligible for, you calculate the amount of your tax offset.

To calculate your claim for the refundable R&D tax offset, you multiply the notional deduction by your corporate tax rate plus a premium of 18.5%.

Follow these steps to calculate your claim for the non-refundable R&D tax offset:

1. Multiply your total expenses by 2% to obtain the amount that your notional deduction is claimed at the lower premium.
2. Multiply the amount of your notional deductions up to the amount obtained in Step 1 by your corporate tax rate plus a premium of 8.5%.
3. Multiply the remaining amount of your notional deductions that exceeds the Step 1 amount by your corporate tax rate plus a premium of 16.5%.
4. If your notional deductions exceed $150 million, the premium worked out at Step 2 and Step 3 is instead worked out on notional deductions of $150 million. The remainder of your notional deductions that exceed $150 million are multiplied by the corporate tax rate.
5. Add the total of the amounts determined under steps 2, 3 and 4 to get your non-refundable offset amount.

Examples to help calculate the tax offset

The examples below will help you work out the R&D tax offset.

 

 

 

Step 6 – Lodging your claim

Once you have determined you can claim the R&D tax incentive tax offset, the final step is to lodge your claim for the income year. You claim the R&D tax offset by completing a research and development tax incentive schedule and the relevant labels of the company tax return and lodging the return and schedule with us. The instructions will help you to complete the forms.

The research and development tax incentive calculator will help you complete the research and development tax incentive schedule. You can print a PDF version of the R&D tax incentive schedule when you have finished your calculations.

This schedule will be accepted for lodgment with your company tax return. If you need assistance refer to the company tax return instructions.

Make sure you have included your unique AusIndustry registration number for the year on your R&D tax incentive schedule before you lodge the form with your company tax return.

Keeping R&D records

You will need to keep the following records to substantiate your claim. Records must generally be kept for a minimum of 5 years. A penalty may be imposed if proper records are not kept.

Business records

Your business records must be sufficient to verify the:

• amount of expenditure incurred on R&D activities
• nature of the R&D activities
• relationship of the expenditure to the activities.

You should keep documents to show how you apportioned expenditure between your eligible core R&D activities and supporting R&D activities as opposed to your other non-R&D activities. It is your responsibility to satisfy us that you used reasonable methods to differentiate between your expenditure on R&D activities and your expenditure on non-R&D activities.

Specific R&D records

You will need to retain documents such as reports detailing the R&D activities you carried out, who conducted the R&D activities and the time your staff spent on the R&D activities.

For more information, see Keeping records as evidence of your R&D activitiesExternal Link guidance on business.gov.au.

Using a tax agent or R&D consultant

If you are planning to pay someone to help you prepare and lodge your tax return or R&D tax incentive schedule, you need to make sure they are a registered tax agent.

Only a registered tax agent can charge a fee to prepare and lodge your tax return, or provide other services described as 'tax agent services'. They must be registered with the Tax Practitioners Board and must follow strict laws that ensure they act in a professional manner.

Tax agent services – if provided for a fee or reward – include advising and assisting you with tax concessions for expenditure incurred on research and development activities, where this involves the application of taxation laws.

Accordingly, an R&D consultant may be required to be registered with the Tax Practitioners Board (TPB).

If you are not sure if your tax agent is registered, you can ask to see their Certificate of Registration or you can visit the Tax Practitioners BoardExternal Link website and search the tax agent register.

Steps to help you work out if you are eligible for the R&D tax offset, how much you can claim and records to keep.