If your business undertakes research and development (R&D) you may be eligible to receive a refundable tax offset to help cover the costs of developing new products or services.
The Research and Development Tax Incentive program provides refundable tax offsets to your business for eligible R&D activities. The eligibility criteria for your business to receive this incentive include:
- your business must be operated using an Australian company
- you must conduct eligible R&D activities
- your expenditure for eligible R&D activities must exceed $20,000 a year.
What is R&D?
To be eligible as a R&D expense under the incentive, expenditure on an activity must be experimental and the outcome of the activity cannot be known or determined in advance on the basis of current knowledge or information. The activity must be conducted for the purpose of generating new knowledge.
The R&D Tax Incentive program is a self assessed program. Documentation must be kept to demonstrate the eligibility of all registered R&D activities. Therefore accurate record keeping is imperative to ensure any claims made can be substantiated.
An application for registration to the program must be made to the Department of Industry. Once received the department will assess your eligibility to partake in the scheme. If your business is deemed eligible, you will receive a R&D Tax Incentive approval number.
The amount of R&D expenditure is included the your company’s tax return. Any expenditure claimed is then eligible for a 43.5% tax rebate. However, if you are claiming the R&D Tax Incentive, you are not able to also claim the money spent on R&D as a tax deduction in your tax return.
As an example, if your company had taxable income of $10,000 for the year (which includes $25,000 deductions for your R&D), the scheme requires you to add-back the amount spent on R&D. Therefore the company’s taxable income would be $35,000 after adding back the R&D expenditure. Tax payable on $35,000 by a company (assuming it is defined as a small business), is $9,625. However, the company is entitled to a tax offset for the R&D expenditure of $10,875. This would result in a tax refund of $1,250 for the year. If no R&D tax offset were claimed, the tax payable would be $2,750 ($10,000 x 27.5%). Therefore the tax saving is $4,000 for the year.
The above example illustrates the benefit of being eligible for this R&D Incentive. We would strongly recommend you review your business practices to determine if any expenditure on R&D is eligible for this incentive.