R&D Tax Incentive

The Research & Development Tax Incentive (R&DTI) is a benefit under the tax laws for companies undertaking certain activities that meet legal definitions of R&D. For eligible entities, the expenditure on those activities is calculated and declared as part of the company tax return each year.

R&D expenditure must be at least $20,000 to qualify, unless it has been incurred to an RSP or CRC.

For companies with an aggregated turnover of <$20m the R&DTI provides a refundable offset equivalent to 43.5% of the eligible expenditure.

Companies that have an aggregated turnover of $20m or more, receive a 38.5% non-refundable offset on eligible R&DTI expenditure up to $100m (this will change in FY22 to a tiered scheme).

That offset reduces the company tax due. The company tax due will have been increased because the R&D expenditure is deducted from being a nominal expenditure, so the net benefit is the difference between the normal company tax rate, and the R&DTI offset rate.

Note that if the company has received government grant funding then an additional recoupment tax applies (regardless of whether the offset is refundable or not), and if the company has incurred eligible R&D expenditure on materials that have been transformed into a product, then a clawback in the form of additional income related to that feedstock amount may also be applied.

So what you can get back from participation in the scheme (and also to consider how much time you are willing to put into it, and how much you will pay for assistance) needs to be assessed against the net benefit less any clawbacks.

It is important to understand that cashing out tax losses is not a permanent benefit of the scheme (the company would get that benefit as a reduction in tax once it becomes profitable). The access to cash in this manner is often vital to the cashflow needs of a young company, but the net benefit is what it is worth to the company over the longer term.

It is also important to understand that if owners are deriving dividends, then applying the R&DTI will reduce the franking credits (because the tax hasn’t been paid). This reduces the value of those dividends and should be taken into account when evaluating the benefit of participation.

The base rate entity company tax rates were reduced to 26% in FY21 and 25% in FY22. With a 43.5% offset, this has increased the net benefit to 18.5% which is great news for small businesses. From FY22 onwards, the rate is pegged at 18.5% above the company tax rate, so that it isn’t necessary to adjust the R&D offset rate if the company tax rate or thresholds change.

The large company offset became a tiered system on 1 July 2021.

In a peculiarity of the tax laws, if your aggregated turnover is less than $20m but the income is more than 80% passive, then the company does not qualify as a base rate entity (so pays the 30% corporate tax rate), but for FY22 onwards, still qualifies for the +18.5% refundable offset because the passive income test is not included in the R&DTI threshold assessment. If you are also in sufficient tax losses, you could therefore cash out at 48.5%, although we suspect that combination of circumstances to be extremely rare.