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Research and Development Tax Incentive
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 that lead to productivity improvements and increased economic growth.
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 R&D 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 R&D Tax Incentive is administered
Industry Innovation and Science Australia (IISA) and the Australian Taxation Office (ATO) are jointly responsible for administering the tax incentive. Our department assists IISA to register R&D activities, while the ATO manages the rules for eligible entities and costs.
Each year IISA 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 reforms: 2020-21 Budget
The government announced enhanced reforms to the R&D Tax Incentive as part of the 2020-21 Budget. Find out more on the budget.gov.au website:
- Budget Paper No.2: Budget Measures, page 19 under the title 'JobMaker Plan — Research and Development Tax Incentive — supporting Australia’s economic recovery'
- Legislation to give effect to these new reforms - Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020.
The Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 passed the Parliament on 9 October 2020, and received Royal Assent on 14 October 2020.
The enhanced reforms to the R&D Tax Incentive apply to income years beginning on or after 1 July 2021. Some administrative elements of the reforms will apply from 1 January 2021.
Lead up to the 2020-21 Budget reforms
The R&D Tax Incentive was reviewed at the launch of the National Innovation and Science Agenda in 2016. 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 R&D Tax Incentive’s effectiveness and integrity, including how the focus could be sharpened to encourage additional R&D investment.
The government announced its initial response to the review as part of the 2018–19 Federal Budget. Revised legislation, the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019, was introduced into Parliament in December 2019. The Senate Economics Legislation Committee has released its report on this legislation, available on the Parliament of Australia website:
The Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 has been superseded by new reforms announced at the 2020-21 Budget, as part of government tax measures to assist economic recovery from the COVID-19 pandemic.
- Find out if you are eligible for the R&D tax incentive and apply on business.gov.au
- See the checklist for claiming the R&D tax incentive on the ATO’s website
Last updated: 8 December 2020
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