When businesses undertake research and development (R&D) activities under the Research & Development Tax Incentive (RDTI), they may claim a tax offset for eligible expenditure. However, where those R&D activities involve transforming materials into tangible products, a feedstock adjustment may apply.
Feedstock adjustments are a specific clawback mechanism within the R&D Tax Incentive rules. Rather than reducing your R&D claim directly, they require you to include an amount in your assessable income when certain conditions are met.
What Is Feedstock?
In the context of the R&D Tax Incentive, feedstock expenditure generally relates to:
- Goods or materials (feedstock inputs) that are transformed or processed during R&D activities
- Energy costs directly used in that transformation or processing
- The decline in value of assets used to acquire or produce feedstock inputs
If you have claimed the Research and Development tax offset for these types of expenditure, and the R&D activity results in tangible outputs, the feedstock rules may apply.
When Does a Feedstock Adjustment Apply?
A feedstock adjustment is triggered when:
- You have claimed the Research and Development tax offset for eligible feedstock expenditure, and
- The R&D activities produce tangible products that are:
- Supplied to others (for example, sold), or
- Applied to your own use (used in your business operations).
If this happens, you must include an additional amount in your assessable income. This amount represents the incentive component of the Research and Development tax offset that relates to the feedstock expenditure.
The adjustment may arise in the same income year the R&D claim is made, or in a later income year, depending on when the product is supplied or applied.
Why Is There a Clawback?
The R&D Tax Incentive provides a tax offset that is generally more favourable than a standard tax deduction. Where R&D activities produce something of value — such as goods that are sold or used — the feedstock adjustment ensures that part of that additional benefit is clawed back.
Importantly, this does not cancel your R&D claim. Instead, it increases your assessable income to reflect the value generated from the feedstock inputs.
A Simplified Example
Scenario
GraniteCo Pty Ltd trials an experimental stone crushing process during the 2022–23 income year.
- It claims $22,000 in notional R&D deductions.
- Of this, $10,000 relates to feedstock expenditure (materials transformed during R&D).
- The company’s tax rate is 25%.
- The granite produced during the trial is sold for $9,000 in the same income year.
Step 1: Determine the Clawback Amount
GraniteCo must compare:
- Feedstock revenue: $9,000
- Feedstock expenditure: $10,000
The clawback amount is the lesser of the two, which is: $9,000
Step 2: Work Out the Incentive Component
The company:
- Calculates its starting Research & Development tax offset on the full $22,000.
- Recalculates the offset after reducing the notional deductions by the $9,000 clawback amount.
- Works out the difference between the two offsets and adjusts for the company’s tax rate.
After applying the formula required under the feedstock adjustment rules, GraniteCo determines it must include:
$6,660 in assessable income for the 2022–23 income year.
What This Means in Practice
Even though GraniteCo claimed the R&D tax incentive on its feedstock costs, because the R&D produced tangible goods that were sold, a portion of the benefit must be clawed back.
The company does not amend its R&D claim. Instead, it includes the calculated feedstock adjustment amount in its assessable income.
Key Takeaways
- Feedstock adjustments apply where R&D activities transform materials into tangible products that are sold or used.
- The adjustment increases assessable income, rather than reducing the R&D claim directly.
- The clawback reflects the incentive component of the tax offset received on feedstock-related expenditure.
If your R&D activities involve producing physical goods, even as part of experimentation or trials, it’s important to consider whether the feedstock adjustment rules may apply.
