R&D Tax Incentive
The 43.5% refundable offset for companies under $20 million turnover, the intensity-based non-refundable offset for larger companies, eligible core and supporting activities, AusIndustry registration, software R&D, overseas activities, and the $150 million expenditure cap.
Companies with aggregated turnover under $20 million receive a 43.5% refundable tax offset on eligible R&D expenditure, meaning the excess over tax liability is paid out as cash. Companies at or above $20 million receive a non-refundable offset at the company tax rate plus 8.5% (for R&D spend up to 2% of total expenses) or plus 16.5% (above 2%). All claims require prior registration with AusIndustry within 10 months of income year-end, and a minimum expenditure of $20,000 unless incurred through a registered Research Service Provider.
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Two tiers: refundable and non-refundable offsets
The R&D Tax Incentive under Division 355 operates as a tax offset (not a deduction), with the rate determined by the company's aggregated turnover.
Eligible R&D activities: core vs supporting
Core R&D activities must be experimental activities where the outcome cannot be known or determined in advance based on current knowledge, information, or experience. They must be conducted via a systematic progression of work based on principles of established science (hypothesis, experiment, observation, evaluation, conclusions), and must be conducted for the purpose of generating new knowledge (new or improved materials, products, devices, processes, or services).
Supporting R&D activities
Must be either directly related to core R&D activities, or have a dominant purpose of supporting core R&D (for activities with a production or commercial character). Examples include data collection, analysis, trial production runs, and software tooling built solely to conduct experiments.
Software development and technical uncertainty
Software-based R&D can qualify, but the bar is set around technical (not commercial) uncertainty. Qualifying activities include development of new algorithms, protocols, or architectures, and significant advances in machine learning methods. Routine software development, standard integrations, UI refreshes, and data migration do not qualify. AusIndustry guidance emphasises documenting hypotheses, experimental design, test results, and evaluation.
AusIndustry registration: the pre-condition for claiming
Companies must register eligible R&D activities with AusIndustry before claiming the tax offset. Registration must be completed within 10 months after the end of the company's income year, through the R&D Tax Incentive customer portal. The registration details required include descriptions of core and supporting activities, aggregated turnover, and high-level expenditure data. If the deadline is missed, the claim is generally lost for that year (limited extension grounds exist).
Minimum $20,000 expenditure threshold
Total notional R&D deductions for the year must exceed $20,000 to claim the offset. The exception is where expenditure is incurred to a registered Research Service Provider (RSP) or is a monetary contribution to a Cooperative Research Centre (CRC), in which case the threshold can be bypassed. The threshold is tested on notional deductions qualifying under Division 355, not overall business spend.
Intensity-based offset for companies at or above $20 million turnover
For companies with aggregated turnover of $20 million or more, the offset rate varies based on R&D intensity: the ratio of R&D expenditure to total expenses. R&D spend up to 2% of total expenses attracts a premium of 8.5% over the company tax rate. Spend above 2% attracts a premium of 16.5%. This creates an incentive for companies to increase R&D intensity relative to their overall cost base. The 'at risk' rules in Division 355 can also claw back claims where expenditure is effectively guaranteed to be recouped regardless of R&D outcomes.
Overseas R&D: limited and tightly controlled
The regime is strongly biased towards onshore activities. Overseas R&D can only be included where it is scientifically linked to an Australian core R&D activity, cannot be conducted in Australia (lack of facilities, geography, or regulatory constraints), and anticipated overseas expenditure is less than anticipated expenditure on related Australian activities. An advance finding from AusIndustry is required before claiming overseas R&D. Without a favourable advance finding, overseas expenditure is excluded from notional deductions.
Common compliance risks and ATO focus areas
The joint AusIndustry/ATO compliance program targets several recurring risk areas.
Worked example: tech startup with $180,000 in R&D spend
Zara runs a biotech startup in Melbourne with aggregated turnover of $2.5 million. In 2025-26, the company incurs $180,000 in eligible R&D expenditure (salaries for research staff, laboratory consumables, and equipment allocated to R&D use). The company has a taxable income of $40,000 before the R&D offset.
Statute references
- ITAA 1997 Division 355 (R&D Tax Incentive framework)
- ITAA 1997 Subdivision 355-B (R&D tax offsets)
- ITAA 1997 s 355-25 (core R&D activities definition)
- ITAA 1997 s 355-405 (at-risk rule for clawback of non-commercial expenditure)
- Industry Research and Development Act 1986 (AusIndustry administration and registration)
Frequently asked questions
What is the difference between core and supporting R&D activities?+
Does routine software development qualify for the R&D Tax Incentive?+
Can I claim the R&D offset and the instant asset write-off on the same asset?+
Can overseas R&D activities be included in a claim?+
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