Research and Development Tax Incentive

What is it?

The Research and Development (R&D) Tax Incentive is the Australian Government's key mechanism to stimulate additional Australian industry investment in research and development.

In 2014-15, the R&D Tax Incentive supported over 15,000 businesses and accounted for approximately 30 per cent of total Government spending on science, research and innovation.

Why does the Government want to encourage greater levels business R&D?

Investment in R&D is a key factor driving innovation and economic growth.

Businesses, however, tend to underinvest in R&D for several reasons, including:

  • an inability to capture all the benefits of their R&D for themselves (as the resulting new knowledge tends to leak out or “spill over” to the benefit of their competitors and the rest of the economy), and
  • difficulties in finding external finance due to the uncertainty around the likely success of an R&D project.

R&D is often the first critical step in innovation, which in turn drives technological improvements, leading to productivity improvements and increased economic growth.

Government therefore has a role to play in encouraging additional business investment in R&D, so that the economy can benefit from the additional spillovers.

Program outline

The R&D Tax Incentive is a broad based, market driven, self-assessed incentive delivered through Australia’s taxation system, designed to induce additional industry investment in R&D.

The program reduces the cost to business of undertaking R&D activities, offering tax offsets for up to $100 million of eligible R&D expenditure each financial year. R&D expenditure of more than $100 million attracts tax offsets at the prevailing company tax rate.

The two main components of the R&D Tax Incentive are currently:

  • a 43.5 per cent refundable tax offset to eligible companies with an aggregated turnover of less than $20 million per annum; and
  • a non-refundable 38.5 per cent tax offset to eligible companies with an aggregated turnover of $20 million or more per annum.

The ‘refundable’ tax offset provides eligible small and medium enterprises a cash refund to the degree that their R&D tax offset entitlement exceeds their tax liability for a particular income year.

The program is available to companies that are:

  • incorporated under an Australian law; or
  • incorporated under foreign law but an Australian resident for income purposes; or
  • incorporated under foreign law and a resident of a country with which Australia has a double tax agreement, including a definition of 'permanent establishment' and carrying on business in Australia through a permanent establishment as defined in the double tax agreement.

Recent changes

Legislation (Budget Savings (Omnibus) Act 2016) to give effect to a measure reducing the refundable and non‑refundable tax offset rates of the R&D Tax Incentive by 1.5 per cent, to 43.5 per cent and 38.5 per cent respectively, received Royal Assent on 16 September 2016.

This change to the program applies to income years starting on or after 1 July 2016.

Review of the R&D Tax Incentive

A review of the R&D Tax Incentive (the Review) was announced during the launch of the National Innovation and Science Agenda in December 2015. The Review Panel comprised Mr Bill Ferris (Chair, Innovation and Science Australia), Dr Alan Finkel (Chief Scientist) and Mr John Fraser (Secretary to the Treasury).

The Review found that the R&D Tax Incentive does not fully meet its stated objectives of additionality and spillovers, and recommended a package of measures to improve its effectiveness, integrity and additionality.

On 28 September 2016, the Review Report and supporting reports were released for public consultation. A comprehensive national consultation process was undertaken, involving written submissions, an online survey, nationwide feedback sessions, and several Ministerial-led roundtables and one-on-one meetings.

The Government continues to consider how best to respond to the recommendations made by the Review Panel, and further informed by the extensive feedback and suggestions provided by the program’s many stakeholders.

The Government will respond to the Review’s recommendations once it has finished its deliberations.

Reporting and governance

Policy responsibility for the R&D Tax Incentive is jointly owned by the Treasurer and the Minister for Industry, Innovation and Science.

The legislative basis for the program is contained in Division 355 of the Income Tax Assessment Act 1997 (at Volume 7, Part 3-45), and in the Industry Research and Development Act 1986.

The program is jointly administered by:

  • AusIndustry, supporting the R&D Incentives committee of Innovation and Science Australia which is responsible for assessing eligibility of activities;
  • the Australian Taxation Office (ATO), which is responsible for assessing eligibility of expenditure.

The R&D Incentives Committee, is responsible for providing advice to the Innovation and Science Australia Board about the operations of the R&D Tax Concession Program for income years commencing before 1 July 2011 and the R&D Tax Incentive Program for income years commencing on or after 1 July 2011.

The R&D Incentives Committee is a sub-committee of the Innovation and Science Australia Board, an independent statutory board with responsibility for providing strategic whole-of-government advice to the Government on all science, research and innovation matters.

The R&D Tax Incentive is reported on annually as part of the Innovation and Science Australia annual report.

The impact on the Budget of the two components of the R&D Tax Incentive—the refundable tax offset and the non-refundable tax offset—are reported on annually in the Science Research and Innovation Budget Tables.

Customer stories

The R&D Tax Incentive provides support to thousands of businesses in all industry sectors across Australia. Read some of the customer stories at business.gov.au:

Key contacts

For more information

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