If your business spends money to develop or improve products, services or solutions, you could be eligible for a generous tax offset. Find out what expenses qualify for up to a 43.5% refund with the R&D Tax Incentive.
Research & Development (R&D) expenses are costs incurred during the everyday running of your business that relates specifically to R&D activities. These costs could be offset with the R&D Tax Incentive.
Example of R&D expenses
Overheads involved in the R&D project could be eligible for the R&D Tax Incentive. This includes expenses such as:
- Salaries of staff involved in R&D project
- Printing and stationary
- Light and power
- Telephone expenses
- Travel expenses
- Equipment used for R&D
- Depreciation of the equipment used for R&D
All R&D expenses need to be proven by documentation that the expenses are directly related to R&D activities. For items such as staff costs or power, you will need to distinguish the percentage of costs for R&D activities, not claiming the percentage for other general business activities.
Example: Company A has 10 employees, seven of whom are directly involved in R&D activities. Three employees are administrative staff that occasionally assist the R&D team with small tasks. Company A also hired contractors solely for the purpose of R&D activities. The company frequently travels for meetings, however only some of these meetings were for the R&D project.
These are all examples of R&D expenses, so Company A could claim:
- The salaries of the seven R&D staff
- Payments to R&D contractors
- The portion of travel expenses directly related to R&D meetings and visits to the trial site
- The portion of salaries for the three admin staff when it directly relates to R&D activities
Other meetings and administrative salaries would need to be excluded and are considered normal business activities.
For a full list of industries and more examples of related R&D activities, head over to our business industries page.
Examples of ineligible R&D expenses
To ensure that the R&D Tax Incentive program is not taken advantage of, there are other expenses outside of regular business activities that would not be considered eligible R&D expenditure.
Examples of these ineligible expenses include:
- If you have declared payments to associates (e.g. sister companies) but was not paid within the income year
- Mark-ups on intra-group transactions
- If you incurred building expenditure that is not related to establishing a plant
For help determining the eligibility of R&D expenses incurred by your business, speak to one of our R&D tax specialists.
What if my business was engaged by another company to do an R&D project?
Companies can engage another company to conduct R&D activities on their behalf. If both companies claim different expenses, then this is not an issue. For example, if Company A claimed the costs of hiring the contractors and travel to the trial site, and Company B claimed the cost of equipment and costs of running the trial site.
However, the two companies can’t ‘double dip’ and claim the exact same R&D activities. In the instance where both companies wish to claim the same R&D expenses, a ‘major benefactor’ must be identified. To help determine this, you must first look at three key criteria:
1. Who ‘effectively owns’ the know-how, intellectual property (IP), or results arising from the R&D activities?
Which company has the knowledge and IP to determine how the R&D activity is completed? For example, if your company is the one that developed the product or solution and you could easily replicate or redevelop it, your company effectively owns the ‘know-how’ – even if another company hired you.
2. Who has control over the conduct of the R&D activities?
Which company has the power to continue or stop the project based on the current progress? This business is considered to have control over the project.
3. Who bears the financial burden of carrying out the R&D activities?
There are many uncertainties involved in R&D activities, so even if another company has provided a budget for you to work with, there is a chance you could go over time and budget constraints. If your business decides to continue the project, you are carrying financial burden of work conducted outside the agreement.
The company that meets all of the above criteria would be considered the major benefactor of the R&D activities. These are quite broad examples, so if you have any questions or would like to determine if your company meets these criteria, contact one of our R&D specialists for a chat about your specific project.
Where to get more information
For complete details of R&D expenditure and eligibility, you can find more information from the following sources:
- The Australian Tax Office (ATO)
- An R&D Tax specialist such as Nifty R&D
The Nifty R&D team at PwC has a depth of experience in assessing, compiling and supporting R&D Tax Incentive claims. Contact us at firstname.lastname@example.org to review your eligibility or discuss your claim.