Everything You Need to Know About Research and Development Tax Incentive Eligibility

Standing out from the crowd isn’t always easy. Regardless of what industry you are in, you likely have a number of competitors hustling for the same share of the market. How do you mark yourself as different (and ideally, above) your competition?

One way is through investment in research and development. The most efficient way of improving your products and services is by funnelling money into the R&D process. Unfortunately, for many businesses, finding the funds to do so proves near impossible.

The Australian Government understands this, and as such, makes significant tax offsets available to businesses who invest in research and development. Sounds too good to be true, right? Well, there are certain strings attached, including the fact that not all businesses will be eligible for this scheme.

Understanding the eligibility criteria for the Research and Development Tax Incentive is not particularly easy. This guide aims to demystify some of the process but if you have any doubts or questions, it’s always a good idea to speak to a qualified tax accountant.

What is the Research and Development Tax Incentive?

The Research and Development Tax Incentive is a program run by the Australian Government that is designed to encourage Australian businesses to invest in research and development. Spending money on these types of activities benefits individual companies, which in turn benefits the wider Australian economy.

As the name suggests, the Research and Development Tax Incentive is an offset, as opposed to a grant. It also covers only certain activities, and not all Australian businesses are eligible.

Who is eligible?

The Research and Development Tax Incentive is what is known as a ‘self-assessment program’. This means that it is an individual company’s responsibility to decide whether their company and activities are eligible for the program.

Of course, if you are not confident dealing with these sorts of matters, you can always bring in a qualified accountant to do so on your behalf.

To qualify for the offset, a company should first and foremost be incorporated under Australian law. Alternatively, they can be incorporated under foreign law but an Australian resident for tax income purposes.

The final category of entity that qualifies is a business that is incorporated under a foreign law whilst being a resident of a country with which Australia has a double tax agreement that includes a definition of a ‘permanent establishment’ and you are performing business in Australia through a permanent establishment as defined in the double tax agreement. As you can see, eligibility guidelines can get fairly complex, which is why it’s always a good idea to first confirm your entity status with an accountant.

In addition, your total nominal deductions for a financial year must be greater than $20,000. If your deductions total less than this, you may still be eligible but additional rules will apply.

Regarding the R&D activities themselves; the Research and Development Tax Incentive is governed by the Income Tax Assessment Act 1997. Section 355.25 of the Act outlines which activities fall under the definition of research and development. To summarise, R&D activities are experimental activities, the outcome of which is not known and can only be determined through applying a scientific method. The activities should generate new knowledge.

How do I apply?

As mentioned, the Research and Development Tax Incentive is a self-assessment program. It is also an annual program, meaning that you will need to apply each year you intend to capitalise on the incentive.

When planning your annual R&D activities, check whether you are eligible for the program. If you are, you will then need to keep track of all R&D activities throughout the financial year. The Australian Taxation Office has some handy tips for the type of information you will need to record to make sure that you meet all relevant tax and legal obligations. You will also need to register your activities with the Department of Industry, Innovation, and Science.

Come the end of the financial year, you can then apply to receive the offset by providing all of the relevant information, including your registration number.

The size of the offset itself will depend on your aggregated turnover. Companies that produce an annual turnover of less than $20 million will receive a different sized offset to companies that generate more than this.

If you decide to use a tax professional to help you with this process — as many businesses do — ensure that they are fully registered with the Tax Practitioners Board.

Investing funds in research and development can often seem like a far-off dream, particularly for small or emerging businesses. The Research and Development Tax Incentive is designed to make your dreams a reality and should certainly be capitalised upon by all eligible companies.