The Research and Development Tax Incentive (R&DTI) is administered jointly by AusIndustry (Department of Industry) and the ATO. It provides significant cash flow benefits to eligible companies conducting qualifying R&D — but the record-keeping and compliance requirements are demanding. Bookkeepers play a critical role in maintaining the expenditure records that support the tax offset claim.
The Two Offset Rates
The R&DTI operates under Income Tax Assessment Act 1936 (ITAA 1936) Part III Div 355 and provides:
- Under current ATO rules for the 2025–26 financial year, a 43.5% refundable tax offset applies for eligible entities with aggregated annual turnover of less than $20 million. Refundable means any excess over tax payable is received as a cash refund — making this a significant cash-flow benefit for pre-profit or early-stage companies.
- 38.5% non-refundable tax offset for entities with turnover of $20 million or more. Non-refundable offsets can only reduce tax payable to zero; excess carries forward.
Both rates represent a premium above the company tax rate — effectively a 16.5% or 11.5% bonus deduction for qualifying R&D expenditure.
The claimant must be an Australian company (not a partnership or trust). Foreign companies can claim if they are Australian residents or have a permanent establishment in Australia.
| Offset rate | Turnover | Refundable? | Premium above company tax rate |
|---|---|---|---|
| 43.5% | Less than $20 million | Yes (cash refund) | 16.5% |
| 38.5% | $20 million or more | No (excess carries forward) | 11.5% |
Core vs. Supporting R&D Activities
Core R&D activities (s 355-25 ITAA 1936) are experimental activities:
- Whose outcome cannot be known or determined in advance
- Based on the principles of science
- Conducted for the purpose of generating new knowledge or creating new or improved materials, products, devices, processes, or services
Supporting R&D activities (s 355-30) are activities that are directly related to core activities, or that are necessary for core activities to be conducted. Supporting activities can be broader (data collection, system integration, testing) but must be linked to specific core activities.
Activities that are not eligible as core R&D:
- Market research, management studies, social science research
- Activities related to style, aesthetic characteristics, or market acceptance
- Prospecting, exploration, or drilling for minerals
- Commercial production of new or improved materials, processes, or products
Bookkeepers should understand this distinction because the ATO and AusIndustry assess whether the activities claimed actually satisfy the experimental principle — not whether they are innovative from a business perspective.
Record-Keeping Requirements
Contemporaneous documentation is not optional — it is the foundation of an R&D claim. The ATO's position (ATO Tax Ruling MT 2012/1 and PCG 2022/3) is that records must be created at the time the activity is conducted, not reconstructed later.
Required records include:
- Activity records: Hypotheses, experimental design, trial results, iterations, conclusions. Lab notebooks, Jira tickets for software development sprints, or dated engineer notes all serve this purpose.
- Expenditure records: Timesheets allocating employee hours to R&D activities, supplier invoices for R&D materials, consultant agreements.
- Nexus records: Linking each expenditure item to a specific registered core or supporting activity.
Bookkeeping best practice: Set up a dedicated cost centre or project code for each R&D activity cluster. Every invoice, payroll allocation, and contractor payment touching R&D should be tagged to the project code in real time. Do not attempt to reconstruct R&D expenditure from general ledger categories at year-end — the ATO has disallowed entire claims on this basis.
Expenditure That Qualifies
Qualifying R&D expenditure includes:
- Employee labour: Salaries and wages (including on-costs) for time spent on eligible activities, supported by timesheets
- Contractor and consultant costs: Where the work is performed on behalf of the claimant and the contractor is not an associate
- Materials: Consumed or transformed in the course of R&D activities
- Overhead allocation: A reasonable allocation of rent, utilities, and equipment costs attributable to R&D activities
- Depreciation: Decline in value of assets used for R&D
Expenditure on assets used only partly for R&D must be apportioned. The apportionment methodology must be documented and applied consistently.
Overseas R&D Expenditure
R&D activities conducted overseas are generally not eligible unless an advance finding (s 28D Industry Research and Development Act 1986) has been obtained from the Chief Scientist, certifying that:
- The overseas activity is a necessary component of Australian R&D
- An equivalent facility or expertise is not available in Australia at a comparable cost
- The activity is conducted in a country with which Australia has a mutual recognition arrangement
Where an advance finding is granted, the amount claimable for overseas expenditure is capped at:
- The lower of the overseas R&D expenditure and 50% of total (domestic + overseas) eligible R&D expenditure
This cap means that overseas-heavy R&D programs cannot achieve more than a 50% overseas expenditure allocation even with an advance finding.
AusIndustry Registration Deadline
R&D activities for a given income year must be registered with AusIndustry within 10 months of the end of that income year. For a 30 June year-end entity, the registration deadline is 30 April of the following year.
Missing the registration deadline forfeits the claim for that year — there is no retrospective extension. Bookkeepers should calendar this date and ensure the entity's R&D consultant or tax agent is engaged well before the deadline.
Interaction with Government Grants
Where a company receives a government grant (including Entrepreneurs' Programme grants, CRC co-funding, and state-based innovation grants) that relates to R&D activities, the grant amount must be offset against the eligible R&D expenditure for those activities.
Eligible R&D expenditure: $500,000
Less: related government grants: $75,000
Net eligible expenditure: $425,000
Offset at 43.5%: $184,875
Grant income is separately assessable. The offset is calculated on the net expenditure after grant reduction.
Bookkeeping Journal for the R&D Offset
When the R&D tax offset is claimed in the company's tax return and a refund arises:
Dr ATO Refund Receivable $184,875
Cr R&D Tax Offset — Income $184,875
Upon receipt of refund:
Dr Bank $184,875
Cr ATO Refund Receivable $184,875
The offset is not assessable income for tax purposes — it reduces the tax liability or generates a cash refund.
Key Reference Points
- ITAA 1936 Part III Div 355 — R&D tax incentive
- Industry Research and Development Act 1986 s 28D — advance finding for overseas R&D
- ATO MT 2012/1 — the R&D tax incentive (overview)
- ATO PCG 2022/3 — practical compliance guideline for R&D record-keeping
- AusIndustry — R&D Tax Incentive Registration — registration portal and guidance
- ATO TR 2021/D5 — meaning of "experimental activities" for core R&D