Research and Development of Australian Taxation Law

Australia Taxation Law

Tax Incentives for Research and Development activities for Small Business in Australia.

In order to encourage the companies for research and development activities the government of Australia has designed R&D tax offsets. Before claiming for offsets these activities need to get registered with the Department of Industry, Innovation and Science. Meer Registration of the activities does not make them eligible under the programme. The registration is examined in detailed by AusIndusrty.  The entities need to maintain adequate records so that they can substantiate their eligibility for Research &Development activities if they get selected by the AusIndustry for compliance review.


There are two types of activities which come under the Research and development Programme (CALOMIRIS, 2011) which are as follows:
  • Core activities: The activities which are experimental and systematic and produces an unknown outcome and are based on the established science which undertakes to generate a new form of technology are known as core activities.
  • Supporting activities: The activities that directly support the experimental activities but they do not form a part of such activities are known as supporting activities.
It is the judgement of the entities whether their activity is core or supporting. While making their judgement they should anticipate whether their activity is experimental and the significance of those activity.    
Allowable Deduction:
The categories allowed as deduction under Section 73A are as follows:
  • Payment to approved research institute
  • Capital expenditure on the business related to scientific research.
  • Expenditure on plant if plant is used for scientific research.
  • Capital expenditure on buildings.
Research & Development activities are conducted for:
The company which conduct the activities for themselves are the only ones who can claim for Research and Development Tax offsets. (For e.g. who owns the result of those activities). But there are exceptions under which they can qualify for such offsets if:
  1. The activities are performed for the associated foreign corporation which are resident of the country and has signed the double tax agreement with Australia;
  2. The entity is a foreign corporation carrying on their business through permanent establishment in Australia and the R&D activities are conducted for the entity not for the permanent establishment.
Components of Tax Incentives
There are two core components of incentives which the company can be eligible for:
  1. The entities which have less than $20 million turnover and are not exempted by the income tax authorities can receive refundable tax offset of 43.5%.
  2. For all other entities the non-refundable tax offset is 38.5% ( entities can carry forward unused offsets amount to future income years)

Principles for compliance assurance activities:

These principles have been formulated to consider the decisions taken by Administrative Appeals Tribunal (AAT). There are numerous of decisions that has resulted in overturning of tax claims for R&D because of failure of records management.

Principle 1
This principle ensures that the internal process satisfy the documentation requirement for R&D Tax Incentive which forms a part of management and project planning.
Principle 2
This principle deals with identification and documentation of R&D projects and eligible activities as when they are conducted so that they can improve the potential to capture the associated cost at the time of occurrence.
Principle 3
To determine a proper understanding of the how the information has been gathered documentation of the method of evaluating projects, identifying the eligibility of the R&D activities and the expenditure associated with those activities which the process repeatable in the upcoming years.
Principle 4
To enable shared understanding of the requirements of the programme there should be a strong nexus among the people who are responsible for preparing and maintaining R&D Tax Incentive records and the people who will understand the technical parts of the project.
Principle 5
There should be a strong link established between activity and expenditure records.

Apply for Registration:

When the company has self-assessed itself and is eligible to claim R&D incentives the company needs to get its activities registered with the Department of Industry, Innovation and science and receive their registration number
  • For every financial year in which the company wishes to claim the offset
  • Within  a period of 10 months after the end of the financial year of the company
  • Before filling the income tax return of the company.
Red alerts for Risky behaviour:
In order to ensure that the tax incentive is benefiting the right person the user and regulator of Research & Development tax incentive should work together.
As a Claimant:
  • If the company haven’t received any advice regarding the claim then it should ask the agent to verify 
  • The eligibility norms of the company’s claims against the department of Industry, innovation and Science’s.
  • The amount of claim with relation to actual expense incurred on the registered activities.
  • Proper records have been maintained by them.
Claiming Tax Offsets:
The company should assess themselves whether the activities conducted by them qualify for claiming under the R&D tax Incentive. There are six steps which helps in working out the claim and the amount of claim. The company should maintain the accurate records because that only makes a good business sense but also required by law. 
To understand it in a better way lets go through a case study to examine some issues small companies go through the change in the  production environment while conducting Research & Development activities.         
The company is owned and operated by two chefs, Mom’s kitchen (MK) which makes gourmet instant meals. The company makes meals for the over occupied people and sales it through local suppliers.
With the increasing growth in the instant meal market the company got encouraged and decided to expend their operation by increasing their production capacity, and they started to supply large quantities to leading retailers. At the time of consultation they came across that the large retailers needed meals which can maintain their quality over longer period of time.
In order to satisfy the large retailers MK decided to extend their refrigerated shelf life. During their research they came across a technology which is high pressure processing which can increase the life of dairy product for a longer period of time.    
  • Experiments were held to test the effect of high pressure processing technology on the instant meals in order to increase their life.
  • Experimenting in order to refine the application of HPP technology to optimize the life of the product.
  • Reviewing the final report provide by the Research service provider (RSP) to MK regarding the experimental activities conducted.
Though, they have found the information regarding application of technology but they did not know how to apply it so they took help from RSP who was specialised in the field of HPP technology. MK and RSP reviewed the R&D plan so as to ensure that the planned activities are eligible for Research & Development Tax Incentive Programme. RSP conducted series of experiment in order to examine the quality of the meal including its taste, texture, nutrition and appearance. After reviewing the results of the experiment MK incorporated the HPP technology in order to fulfil the requirement of large retailers.
Supporting R&D activities related with the process:
  • Conducting research programme into the HPP technology
  • Producing sample meals which can be used by RSP during the experimentation
  • Making a trial production using the new HPP unit in the operating environment.
After the installation of the equipment and staff training MK conducted several test to examine that the settings of the meal production has not been altered. For self-assessing that the R&D project is completed and the product is ready for delivery MK has conducted test regarding both the quality and shelf life of the meals produced from small and large production. 

What documents MK is required to maintain?

Earlier MK was not into the practice for maintaining proper records. In support of their R&D Tax incentive (CAI, Wang & Ai, 2014) application MK is required to do a proper book recording for future business practice. MK felt the need to maintain the following records:
  • Emails: MK has kept the records that are associated with RSP including R&D plans for performing trails. The correspondence with manufacturer with regard to modification made in HPP unit.
  • R&D Plan: The plan developed by the RSP prior conducting experiments which provides the direction and purpose of the project. The plan would include the ways through which the project will turn out to be commercially successful for the company, the statements regarding the technical objectivity, timeliness and the allocation of resources to the project that includes personnel funding, and the facilities necessary for the project.
  • Reports: The report regarding the trails conducted by the RSP were provide to MK. These report also includes the details regarding staff training programme and equipment modification.
  • Observation and Production run sheet: MK has kept the records of the information derived while conducting the small and large production.
Maintain these records has ensured the MK has meet the compliance requirement and if gets selected in the compliance review by the AusIndustry then will be able to work.

Comments with respect to compliance with the R&D Tax Incentive Plan:

New technology using the Existing one:
The technology used by MK which is HPP technology which is already existed and was in use to enhance the life of dairy products. MK has applied this new technology to their new manufactured products to examine the outcome that could be known beforehand.
Registration of R&D activities:
The R&D project taken up by the MK’s was completed within seven months lasting from March to September of the current year. The annual registration of the activities was required in the year they were conducted by the companies. There is a period of ten months within which the company has to file their registration after the end of their financial year. The MK required to get its activities registered in both the financial years as MK operated on a July to June financial year. 
Using the services provided by RSP:
After the completion of first financial year MK has performed his own research and has taken the services of Research Service Provider and has developed the R&D plan which has cost them less than $20000. But, because MK has appointed an RSP for performing their R&D activities they were eligible to claim the expenses incurred on registered R&D activities under the programme even though their claim amount was less than the threshold limit of $20000 in one financial year.  


Cai, D., Wang, T., & Ai, C. (2014). Development of Low-Carbon Economy in Heilongjiang Province Tax Incentive Policy Analysis. Advanced Materials Research, 1073-1076, 2683-2686.

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