At what point can I claim a tax credit for research?

I’ve heard a bit about the R&D tax credit – it seems like a decent scheme but how can I take advantage of it?

How do I know if my innovation actually qualifies as R&D?

The federal government introduced the Research and Development (R&D) Tax Incentive regime in a bid to encourage industry investment in R&D and innovation.

The scheme is administered jointly by AusIndustry (on behalf of Innovation Australia) and the Australian Taxation Office. The R&D tax incentive provides a tax offset to eligible companies that engage in R&D activities.

Companies engaged in R&D may be eligible for either:

a 45% refundable tax offset – for entities with an aggregated turnover of less than $20 million per annum which are not controlled by income tax exempt entities, or

a 40% non-refundable tax offset – for all other entities.

The registration of R&D activities is managed by AusIndustry and it checks that the activities comply with the law. The ATO determines the eligibility of the expenditure claimed in the tax return.

Eligibility begins with the structure that is conducting the R&D. The following are considered eligible entities:

an Australian resident company; or

a foreign company that is a resident of a country with which Australia has a double tax agreement and carries on R&D activities through a permanent establishment in Australia; or

a public trading trust with a corporate trustee.

If you are operating through an eligible entity, you must register your R&D activities with AusIndustry:

within 10 months after the end of the income year (registering for the income year in which the offset is to be claimed), and

prior to claiming the R&D tax offset in the tax return.

This means that you have until April 30 to submit your R&D application with AusIndustry. Once you have met the deadline and submitted your application, AusIndustry will review your activities in order to determine whether they are eligible ‘core activities’.

To be eligible, core activities must be experimental. As per the Tax Office’s Guide to the Research and Development Tax Incentive, these activities are those where the 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 is based on principles of established science; proceeds from hypothesis to experiment, observation and evaluation; and leads to logical conclusions. These experiments are conducted for the purpose of generating new knowledge (including about creating new knowledge or improved materials, products, devices, processes or services).

Excluded activities can be found through the AusIndustry website.

Non-core R&D activities include:

market research;

management studies or efficiency surveys;

developing, modifying or customising computer software for the dominant purpose of internal administration of business functions; and

commercial, legal and administrative aspects of patenting, licensing or other activities.

The assessment of whether your business qualifies for the R&D Tax Incentive should be guided by the activities you are undertaking and your professional tax advisor. Although it is a common misconception – the R&D Tax Incentive is not a government grant, it is a tax incentive and its benefits flow through the company tax return.

This is largely why the ATO has a clear expectation that anyone advising businesses on R&D tax for a fee must be a registered tax agent.

Make sure that your advisor is one. If in doubt, visit the Tax Practitioners Board website.