Defining the Research and Development Tax Incentive

R&D Tax Incentive

The Australian Government’s Research and Development Tax Incentive is a fantastic way for eligible businesses to invest in research and development. Often, the funding required to participate in these activities is prohibitive, particularly for small and medium-sized businesses. However, engaging in research and development is often the most direct way to expand operations and keep up with competitors. The R&D Tax Incentive aims to facilitate this.

Whether your company is planning to take advantage of the R&D Tax Incentive for the first time, or you are an experienced veteran of this program, it’s critical to keep in mind the rules and regulations. The Australian Government is very clear on what they consider to be ‘research and development activities.’ The last thing you want is to spend significant time and money on research and development under the assumption you are eligible for the program, only to find come tax time that this is not the case.

Calibre Business Advisory’s team of experienced tax accountantshas helped many businesses navigate the rules and regulations associated with the Research and Development Tax Incentive. If you’re considering capitalising on this program, we encourage you to reach out to discuss your plans and options.

What is research and development?

Broadly speaking, research and development includes any activities designed to develop new services or products and improve existing ones. What you would consider research and development activities really depends on the industry you are in.

In an attempt to make the Research and Development Tax Incentive program as clear as possible, the Australian Government offers a very strict definition of what constitutes research and development activities. Activities are categorised under two headings: core and supporting.

Core activities are those that:

  • Are conducted for the purposes of generating new knowledge, including a new product, process, or service.
  • Have outcomes that a competent professional can’t know or determine in advance, based on current knowledge, information, and experience.
  • The outcome of core R&D activities 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.

How can you be sure that the outcome of your activity cannot be determined in advance? Depending on the industry you are in, this can be a challenging task. The Australian Government recommends reviewing professional literature, carrying out internet searches, conducting patent searches, and seeking advice from industry experts. Most importantly, they state that they expect you to keep evidence of your enquiries. This type of information may be required when you submit your tax return.

Supporting R&D activities are those that relate directly to core R&D activities. This is a rather broad definition, and dictates that ‘whether your supporting R&D activity relates directly to a core R&D activity will depend on your circumstances.’

Ambiguous definitions such as this are why many businesses can benefit from seeking out advice from an R&D Tax Incentive expert, like the team at Calibre Business Advisory. Calibre Business Advisory can help you determine whether your activities meet eligibility requirements and outline what types of records you need to keep to prove your claims.

Am I eligible?

It is not only your research and development activities that must meet eligibility requirements, but your business structure too.

You may be eligible for the Research and Development Tax Incentive if your company is:

  • Incorporated under Australian law
  • Incorporated under a foreign law but you are an Australian resident for tax income purposes
  • Incorporated under Australian law and you are:
    • A resident of a country with which Australia has a double tax agreement that includes a definition of ‘permanent establishment’
    • Carrying on business in Australia through a permanent establishment as defined in the double tax agreement.

Individuals are not eligible for the R&D Tax Incentive.

Still not sure whether your business is able to take advantage of this program? Contact Calibre Business Advisory today. With a wealth of experience helping companies navigate schemes including the R&D Tax Incentive and EMDG grant, Calibre Business Advisory is perfectly positioned to help your business take the next step. Speak to our team of trained and experienced tax accountants today about the opportunities available to your business and how to make the most of the Research and Development Tax Incentive.