You can't claim a notional deduction for expenses that do not have a direct and close connection to your R&D activities. Specifically, they can't relate to general company operating or marketing expenditure that would be incurred regardless of the R&D activities.
Common expenses you can't claim
Expenses that can't be claimed could include:
- advertising (for instance, of a company's product)
- audit fees
- bad debts
- company establishment and other fees incurred under the companies code in relation to the administration of the company
- costs incurred in preparing taxation returns
- decline in value of a depreciating asset
- director's fees
- distribution and selling expenses
- donations
- employee benefits such as canteen and recreational facilities
- entertainment expenses
- grounds and garden maintenance costs
- insurance premiums on matters unrelated to R&D such as loss of profits and product liability
- legal expenses not associated with any approved research project, for example, legal expenses for a patent search before undertaking a research project or in taking out a patent after a successful project
- patents and trademarks in marketing a new product or technology, or as a result of R&D activity
- rent paid for premises that are not used in R&D activities
- salaries, associated costs and on-costs of support staff not linked with R&D activities and of staff employed in areas such as distribution, sales, marketing and debt collection
- tender costs.
Excluded expenditure
In addition to these expenses, certain expenditure is specifically excluded under section 355-225 of the ITAA 1997 from being eligible for a notional deduction.
You can't notionally deduct the following types of expenditure under the R&D tax incentive:
- interest expenditure (within the meaning of interest in the withholding tax rules)
- expenditure that isn't at risk
- core technology expenditure
- expenditure included in the cost of a depreciating asset (decline in value notional deductions may apply however)
- expenditure incurred to acquire or construct a building (or part of a building or an extension, alteration or improvement to a building).
These types of expenditure do not warrant the enhanced tax benefits available under the R&D tax offsets. However, they should be considered under the normal deduction provisions of the income tax law as you may still be able to deduct these amounts from your assessable income.
Due to specific exclusions in section 355-225 of the ITAA 1997, some types of salary expenditure can't be claimed if incurred on:
- the construction of depreciating assets
- structural improvements or buildings.
Interest expenditure
Interest incurred isn't eligible for a notional R&D deduction.
Interest has the same broad meaning as it has in the withholding tax rules in Division 11A of Part III of the ITAA 1936. This includes an amount in interest (for example, a discount on a security) and a dividend on a non-equity share.
Expenditure that isn't at risk
Expenditure that isn't at risk (for example, if there is guaranteed return under a financing arrangement or an indemnity) isn't eligible for a notional R&D deduction.
Expenditure isn't at risk when it is incurred and you (or your associate) could reasonably be expected to receive an amount of consideration:
- as a result of the expenditure being incurred or because of anything that happened before then
- irrespective of the results of the activities on which the entity incurs the expenditure.
See Taxation Ruling TR 2021/5 Income tax: research and development tax offsets – the 'at risk' rule.
Interaction with JobKeeper payment
If you received a JobKeeper payment for your paid employee, you triggered the at-risk rule. You can't notionally deduct the portion of your wage expenditure incurred on R&D activities that attracted the JobKeeper payment.
If your employee is wholly engaged in R&D activities during a fortnight, you can't notionally deduct the portion of your wage expenditure that is equal to the JobKeeper payment. If your employee is partially engaged in R&D activities, your JobKeeper payment was apportioned. You can claim by reducing your notional deduction by that portion of the JobKeeper payment as is in proportion with the time the employee spent on R&D activities during that fortnight.
Where you received an amount of JobKeeper payment for your employee and that employee was only partially engaged in R&D activities, you must keep records, such as timesheets, job cards or diaries, to show the time the employee spent on R&D activities during each fortnight for which you received JobKeeper for that employee.
If you received a JobKeeper payment based on business participation, you do not trigger the at-risk rule.
See Taxation Determination TD 2021/9 Income tax: notional deductions for research and development activities subsidised by JobKeeper payments for examples of how the notional deduction is reduced by the JobKeeper payment.
Interaction with cash flow boost
You also do not trigger the at-risk rule if you receive a cash flow boost payment.
Expectations
Your expenditure can be at risk (and therefore eligible for an R&D tax offset) where the expectation of receiving consideration under a contract for the development and sale of a product is based on both the:
- terms and conditions of that contract
- entity's experience and technical capability concerning the degree of confidence about successfully performing that contract.
Where this product development involves R&D activities and the conditions above exist the expectation of receiving consideration under this contract can't be said to exist irrespective of the results of these activities.
Foreign corporations undertaking your R&D
The rule about expenditure not at risk does not apply to R&D activities conducted by you for one or more foreign corporations related to you. Nor does it apply to the corresponding permanent establishment case, where activities are conducted by a foreign corporation though a permanent establishment in Australia for other parts of the corporation.
Core technology expenditure
Expenditure incurred in acquiring technology that is 'core technology' is ineligible for the R&D tax incentive.
Undeducted core technology
There are transitional rules in place to ensure that core technology expenditure (within the meaning of former section 73B of the Income Tax Assessment Act 1936) remaining after the last income year commencing before 1 July 2011 is eligible for deduction.
In most cases, the undeducted expenditure is deductible in equal proportions over 5 income years, starting in the first income year commencing on or after 1 July 2010. However, if the core technology is a depreciating asset, the depreciating asset provisions in Division 40 of the ITAA 1997 will apply on the basis that the opening adjustable amount is the amount of undeducted expenditure in relation to the asset.
Undeducted core technology expenditure isn't included as a notional R&D deduction. It should be claimed at label X Other deductible expenses in item 7 of the company tax return.
See Transition from the R&D tax concession to the R&D tax incentive for more information, or business.gov.auExternal Link for information about core technology.
Cost of a depreciating asset
Expenditure included in the cost of a tangible depreciating asset is ineligible for a notional deduction under the R&D expenditure provisions. Notional deductions for the decline in value of R&D depreciating assets must be considered under the R&D decline in value provisions.
Acquire or construct a building
Expenditure incurred to acquire or construct a building, part of a building, or an extension, alteration or improvement to a building, is ineligible for a notional R&D deduction. However, deductions may be available under the capital works provisions in Division 43 of the ITAA 1997.
There is an exception for expenditure on a building that is plant, or a depreciating asset. That expenditure is specifically excluded from Division 43 of the ITAA 1997 and therefore such a building is subject to the depreciating asset rules in Division 40 of the ITAA 1997. Consequently, an R&D entity may be able to claim a notional deduction for the decline in value of a building that is a depreciating asset.