The Research and Development Tax Incentive is one of the most significant government concessions available to Australian innovation-driven businesses. It is also one of the most frequently misunderstood — and misapplied. The ATO and AusIndustry conduct joint reviews, and claims that cannot be substantiated with contemporaneous records are rejected and can trigger penalties.
Who administers it?
The R&D Tax Incentive is administered jointly by:
- AusIndustry (DISR): Administers R&D registration and determines whether activities qualify as eligible R&D
- ATO: Administers the tax offset calculation and audits the financial claims
Both agencies can review a claim independently. A claim that passes ATO financial scrutiny can still be rejected if AusIndustry determines the activities were not eligible R&D.
The two offset rates
Small companies (aggregated turnover under $20M): 43.5% refundable tax offset. If the company is in a tax loss position, the offset generates a cash refund — this is particularly valuable for pre-revenue startups.
Larger companies (aggregated turnover $20M or more): 38.5% non-refundable tax offset, capped at $150M in R&D expenditure per year.
The refundable offset is the headline feature. A startup spending $500,000 on eligible R&D can receive $217,500 back as a cash refund, regardless of whether it has taxable income.
What is eligible R&D?
The core test is the core R&D activity definition: activities whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, and that involve a systematic progression of work based on principles of established science.
This means genuine experimental uncertainty. Activities where the outcome is known or the risk is commercial rather than technical generally do not qualify as core R&D.
Supporting R&D activities — activities directly related to core activities — can also be included, but only if the core activity is eligible.
Excluded activities include market research, management studies, social science, commercial production, maintaining existing products or processes, and activities done wholly outside Australia (with limited exceptions).
Common eligible activities in Australian businesses
- Software development that involves genuine technical uncertainty (not standard programming or debugging)
- Pharmaceutical or medical device development
- Agricultural research (new crop varieties, soil treatment methods)
- Manufacturing process innovation
- New materials development
The key word in all of these is uncertainty. If your client's development team knew at the start that the approach would work, the activity likely does not qualify.
Registration requirements
R&D activities must be registered with AusIndustry within 10 months of the end of the income year. For the year ended 30 June 2027, the registration deadline is 30 April 2028.
Registration is a precondition for claiming the offset in the tax return. A company that fails to register in time forfeits the entire claim for that year — there is no late registration mechanism.
Expenditure that can be claimed
Eligible R&D expenditure includes:
- Salary and wages of employees engaged in R&D activities (apportioned if not fully dedicated)
- Contractor costs (with specific rules for Australian contractors vs. foreign contractors)
- Overheads directly attributable to R&D activities (apportioned from total overheads)
- R&D materials consumed or transformed
- Decline in value of assets used for R&D
The expenditure must have been incurred for the purpose of the R&D activities, not for other business purposes.
The contemporaneous record-keeping requirement
This is where most unsuccessful claims fail. AusIndustry expects contemporaneous records demonstrating:
- What the technical uncertainty or hypothesis was at the start
- What the experimental methodology was
- What the results were (including failed experiments)
- Time records showing which staff worked on R&D vs. other activities
- Cost allocation between R&D and non-R&D
Records created after the fact — even if technically accurate — are viewed with significant scepticism. A research lab notebook, project management logs, version control history, and time-tracking software output are examples of contemporaneous records.
Bookkeeping setup for R&D claimants
For clients claiming the R&D incentive, the chart of accounts should be set up to separately track:
- R&D labour costs (by project code if multiple R&D projects)
- R&D contractor costs
- R&D materials
- Overhead allocation to R&D
A separate R&D project code in the accounting system allows a clean cost extraction at year end. Trying to reconstruct R&D costs from general accounts at the time of registration is error-prone and creates audit risk.
ATO and AusIndustry review risk
The R&D Tax Incentive is in a high-risk category for both agencies. Common triggers for review:
- Large increases in claimed expenditure without corresponding business growth
- Claims in industries where R&D is less common
- Use of R&D tax advisers who are known to push boundary cases
- Software claims without clear technical uncertainty documentation
For clients with claims over $1M annually, specialist R&D tax advice and a pre-lodgement review of AusIndustry registration documents is advisable.