How is the R&D Tax Incentive Calculated?
The Australian R&D Tax Incentive is calculated based on your company’s eligible research and development (R&D) expenses. To determine the benefit, businesses must first identify and substantiate qualifying expenditures that correlate to experimental activities to generate new knowledge or improve processes.
The program offers a 43.5% refundable tax offset for companies with an aggregated turnover of less than $20 million and a non-refundable tax offset of between 8.5% – 16.5% for larger businesses.
By claiming the R&D Tax Incentive, you can significantly reduce your tax liability or receive a cash refund, making it a valuable opportunity for organisations investing in innovation.
Business scenarios to help determine the R&D Tax Incentive benefit
To understand how the Australian R&D Tax Incentive is calculated, let’s examine three business scenarios. Each scenario highlights how diverse industries can leverage the Incentive to reduce costs while driving innovation and growth.
Scenario #1
Loss Making Entity
The R&D Tax Incentive funding can be a game-changer for loss-making entities, as it helps offset their development costs and provides much-needed capital to fuel further innovation and growth. Let’s explore this as an example.
Unicorn to Be Pty Ltd, an innovative startup, has begun developing its groundbreaking product. During this process, they have incurred total expenses amounting to $400,000. Out of this, $250,000 qualified as eligible R&D expenses. By leveraging the R&D Tax Incentive, Unicorn to Be Pty Ltd can claim $108,750 in cash benefits.
Rate | Amount | |
|---|---|---|
Revenue | – | |
Expenses | 400,000 | |
Loss | (400,000) | |
Tax | 25% | – |
Add Back R&D Expenses | 250,000 | |
Profit/Loss after R&D expenses addback | (150,000) | |
Tax after R&D expenses addback | 25% | – |
R&D Offset | 43.50% | 108,750 |
R&D Refundable cash back benefit | 108,750 | |
Summary | ||
The refund not using the R&D Tax Incentive | – | |
The refund using the R&D Tax Incentive | 108,750 | |
Cash back from the r&d tax incentive | 108,750 |
In this example, Unicorn to Be Pty Ltd doesn’t have any revenue. However, the main point to look out for is that the entity is in a loss. If Unicorn to Be had revenue but still had losses, the calculation would look very similar.
Scenario #2
Profit Making Entity
For profit-making entities, the R&D Tax Incentive provides a strategic advantage that allows the company to reinvest in innovation and maintain its competitive edge in the market. Let’s look at an example.
Go-Kart Mechanics Pty Ltd, a company specialising in producing innovative aerodynamic go-kart parts, generates an impressive $1,000,000 in revenue annually. With $550,000 in expenses, $500,000 qualify as eligible R&D expenses under the R&D Tax Incentive program.
By leveraging the R&D Tax Incentive, Go-Kart Mechanics will save $92,500 in taxes, directly reducing their financial obligations.
Rate | Amount | |
|---|---|---|
Revenue | 1,000,000 | |
Expenses | 550,000 | |
Profit / (Loss) | 450,000 | |
Tax | 25% | (112,500) |
Add Back R&D Expenses | 500,000 | |
Profit / (Loss after R&D expenses addback) | 950,000 | |
Tax after R&D expenses addback | 25% | (237,500) |
R&D Offset | 43.50% | 217,500 |
Tax payable after R&D offset | (20,000) | |
Summary | ||
Tax payable not using the R&D tax incentive | (112,500) | |
Tax payable using the R&D tax incentive | (20,000) | |
Tax saving benefit from the R&D Tax Incentive | 92,500 |
Scenario #3
Small Profit-Making Entity
Let’s look at another profit-making example.
Eye Shade Pty Ltd specialises in creating long-lasting eyeshadow makeup that stands out in the market. The company generates $400,000 in revenue and incurs $350,000 in expenses annually. Of these expenses, $200,000 are eligible for Research and Development (R&D) benefits.
Eye Shade will receive $37,000 in R&D benefits, split between a $13,750 tax-saving and $18,250 cash-back benefits.
Rate | Amount | |
|---|---|---|
Revenue | 400,000 | |
Expenses | 350,000 | |
Profit / (Loss) | 50,000 | |
Tax | 25% | (12,500) |
Add Back R&D Expenses | 200,000 | |
Profit / (Loss after R&D expenses addback) | 250,000 | |
Tax after R&D expenses addback | 25% | (62,500) |
R&D Offset | 43.50% | 87,000 |
Tax payable after R&D offset | 24,500 | |
Total R&D benefit | ||
Summary | ||
Tax payable not using R&D Tax Incentive | (12,500) | |
Tax payable using R&D Tax Incentive | – | |
R&D Tax Saving Benefit | 12,500 | |
Tax refund not using the R&D Tax Incentive | – | |
Tax refund using the R&D Tax Incentive | 24,500 | |
R&D Refundable cash back benefit | 24,500 | |
Total tax saving & cash back benefit: | 37,000 |
Entities with an aggregate turnover above $20 Million
If an R&D entity’s aggregate turnover exceeds $20 million, the following conditions apply:
- The entity is eligible only for a non-refundable benefit. Unfortunately, the refundable cash-back benefit is not available in this case.
- The R&D tax offset rate decreases to a benefit between 8.5% and 16.5%, compared to the standard benefit of between 18.5% and 43.5%.
The non-refundable R&D tax offset for companies over $20m in aggregate turnover is equal to the company tax rate, plus an 8.5% premium on R&D spend up to 2% of total expenditure and a 16.5% premium on R&D spend above 2%.
It’s important for larger entities to account for these adjustments when calculating their R&D incentives.
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FAQs
What is an R&D tax incentive example for a small business?
An R&D tax incentive example for a small business would be a startup spending $100,000 on eligible R&D activities. With the current R&D tax offset rate of 43.5%, the business could receive a refundable R&D tax offset of $43,500. Using an R&D tax incentive calculator helps estimate this benefit and shows how the refund boosts cash flow immediately.
How does the R&D tax incentive calculator work?
An R&D tax incentive calculator uses your company’s R&D expenditure, turnover, and profit/loss position to estimate your benefit. It applies the relevant R&D tax offset rate to determine either a tax saving or a refundable R&D tax offset. While an online calculator provides estimates, real results depend on substantiated records. Looking at an R&D tax incentive example can help compare scenarios for accuracy.
What is the current R&D tax offset rate for companies under $20 million turnover?
For entities with turnover under $20 million, the R&D tax offset rate is 43.5%. This often results in a refundable R&D tax offset, meaning cash back to support further innovation. An R&D tax incentive example shows that if you spend $200,000 on eligible R&D, you could receive $87,000 back. Using an R&D tax incentive calculator ensures you model your refund correctly.
What happens if my company makes a profit? Can I still get a refundable R&D tax offset?
If your company is profitable, you may receive the benefit as a tax saving rather than a cash refund. The R&D tax offset rate still applies, but the outcome is not always a refundable R&D tax offset. In this case, an R&D tax incentive calculator will show reduced tax payable rather than cash back. An R&D tax incentive example for profit-making companies highlights how savings can still be substantial.
Can larger companies still benefit even without a refundable R&D tax offset?
Yes. Companies with turnover over $20 million are not eligible for a refundable R&D tax offset but can still reduce their tax through the R&D tax offset rate of 8.5% to 16.5% of their R&D spend.
How does an R&D tax incentive example differ between startups and established businesses?
A startup often receives a refundable R&D tax offset because they are loss-making, whereas an established business may see benefits as reduced tax payable. For instance, an R&D tax incentive example of a startup spending $400,000 could lead to $174,000 refunded, while a profitable company might reduce tax by $74,000. Using an R&D tax incentive calculator helps visualise the difference at the current R&D tax offset rate.
Is the R&D tax incentive calculator accurate for complex group structures?
An R&D tax incentive calculator is a good guide, but complex corporate structures may need tailored calculations. Group turnover can impact eligibility for the refundable R&D tax offset and which R&D tax offset rate applies. Reviewing an R&D tax incentive example may give insight, but businesses with subsidiaries or cross-entity costs should seek specialist advice beyond standard calculators.
Can the R&D tax offset rate change in future years?
Yes, the government periodically reviews the R&D tax offset rate. While currently set at 43.5% for smaller entities, policy changes could impact the value of both tax savings and refundable R&D tax offsets. This makes it important to check updated rates before using an R&D tax incentive calculator. Looking at an older R&D tax incentive example may not reflect future offsets.
How do I calculate the split between tax savings and refundable cash?
The split depends on your company’s tax position. An R&D tax incentive calculator applies the R&D tax offset rate to eligible spend and then distinguishes between non-refundable credits and refundable R&D tax offsets. An R&D tax incentive example of a small profit-making entity might show part of the benefit reducing tax and part refunded in cash. This balance changes with turnover and profitability.
Why should I use an R&D tax incentive calculator instead of manual estimates?
Manual calculations risk missing adjustments like carry-forward losses, group turnover, or timing differences. An R&D tax incentive calculator applies the correct R&D tax offset rate automatically and shows whether you’ll receive a refundable R&D tax offset or just tax savings. Reviewing an R&D tax incentive example alongside calculator results ensures accuracy and helps businesses plan funding and reinvestment with confidence.
How much could you receive back from the R&D Tax Incentive?
Contact Rimon Advisory today at 1300 881 352 to discover how your business can benefit from the R&D Tax Incentive.