Refundable Offset

If the company is in tax losses, then if the R&D offset is refundable, the additional tax losses will be refunded in cash up to the amount of the offset. To receive the offset in full, the accumulated tax losses (prior to calculating the R&DTI) will need to exceed the R&D expenditure. If it’s less, then the maximum cash refund will be the extent of the tax losses.

As an example

If during FY21 you spent $500,000 on running the business, and you received $300,000 in income. Then without claiming R&D you would have a negative $200,000 profitability ($200,000 loss) which you can carry forward to a future tax year (FY22).

In the following year if you received $800,000 income for the same expenditure, you would have made a taxable profit of $300,000. As you have $200,000 in carry forward losses, then you only get taxed on $100,000 in the second year.

 

Net tax at 25% (FY22 tax rate) = $25,000

 

If in both of those years you were eligible to claim $250,000 as R&D expenditure the tax positions change to…

Year 1 (using FY21 tax rates)
$500,000 spend-$250,000 R&D = $250,000 non-R&D spend for $300,000 of income = $50,000 taxable at 26% = $13,000

But $250,000 at 43.5% offset is $108,750, less the $13,000 means the ATO will pay cash of $95,750 and you have no carry forward tax losses.

 

Year 2 (using FY22 tax rates)
$500,000 spend-$250,000 R&D = $250,000 non-R&D spend for $800,000 of income = $550,000 taxable at 25% = $137,500

$250,000 at 43.5% offset is $108,750, Deducted from the $137,500, means tax payable is $28,750

Net tax refund over the 2 years is $67,000 ($95,750 received in year 1, less the $28,750 paid in year 2)

So by claiming R&DTI of $250,000 a year you gain by $90,000 over the 2 years (17.5% of the R&D spend in year 1 plus 18.5% in year 2). We refer to those percentages as the ‘net benefit’ – it’s the difference between the R&D rate of 43.5% and the tax rate (this net benefit is therefore 17.5% in FY21 and 18.5% in FY22 onwards as a result of tax rate changes). It varies depending on company size as the rates change for different company profiles.

So the refundable mechanism of the R&DTI means you have $95,750 (in this example) in your pocket in year 1, which if you had rolled forward tax losses instead would otherwise only have benefitted you at the end of year 2 when it came time to pay the tax bill, so there’s a timing benefit to participation in the R&DTI scheme, as well as the net benefit gain.