The Research and development (R&D) tax incentive is the government’s key mechanism to stimulate Australian industry’s investment in R&D.
Encouraging businesses to invest in R&D
R&D is often the first critical step in innovation, it drives technological improvements which lead to productivity improvements and increased economic growth.
Unfortunately, companies tend to underinvest in R&D for several reasons, including:
- not being able to capture the benefits of their R&D because new knowledge tends to leak out or 'spill over' to benefit competitors and the rest of the economy
- difficulties finding external finance because of uncertainties around the likely success of their R&D projects
This is why the government has a role to play in encouraging industry to invest more in R&D. The tax incentive offers a way for companies to invest in R&D while alleviating some of their initial reasons for not investing.
Eligibility for the tax incentive
The tax incentive reduces company R&D costs by offering tax offsets for eligible R&D expenditure.
Eligible companies with a turnover of less than $20 million receive a refundable tax offset, allowing the benefit to be paid as a cash refund if they are in a tax loss position. All other eligible companies receive a non-refundable tax offset to help reduce the tax they pay.
The program is available to companies who are:
- incorporated under Australian law
- incorporated under foreign law but an Australian resident for income purposes
- incorporated under foreign law and a resident of a country with which Australia has a double tax agreement
How the tax incentive is administered
Innovation and Science Australia (ISA) and the Australian Taxation Office (ATO) are jointly responsible for administering the tax incentive. Our department assists ISA to register R&D activities, while the ATO manages the rules for eligible entities and costs.
Each year ISA reports on the tax incentive in their annual report.
The tax incentive’s budget impact (the refundable tax offset and the non-refundable tax offset) is reported annually in the science, research and innovation budget tables.
R&D tax incentive review
The tax incentive was reviewed at the launch of the National Innovation and Science Agenda. The Chair of Innovation Australia, the Chief Scientist of Australia, and the Secretary to the Treasury chaired the review panel.
The review looked at ways to improve the tax incentive’s effectiveness and integrity, including how the focus could be sharpened to encourage additional R&D investment.
The government announced its response to the review as part of the 2018–19 Federal Budget. See details of the proposed changes in the Minister’s media release and Treasurer’s fact sheet.
Revised legislation, the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019, was introduced into Parliament in December 2019.