What Is the R&D Tax Incentive?

The R&D Tax Incentive is a core Australian Government program designed to encourage companies to invest in research and development. It replaces the old R&D Tax Concession and offers a more generous tax offset structure.

The program provides either a refundable or non-refundable tax offset depending on your company's aggregated turnover. This offset reduces your company's tax liability dollar-for-dollar, making it one of the most valuable tax incentives available to Australian businesses.

For the FY 2025-26 income year, the program continues with the rates set under the 2024 legislative amendments. These rates have been stable since the last major reform, providing certainty for businesses planning their R&D activities.

Eligible companies can claim the offset for activities that involve systematic investigation or experimentation to generate new knowledge. This includes developing new products, processes, or services, or improving existing ones.

R&D Tax Offset Rates for FY 2025-26

The rate you receive depends on your company's aggregated turnover. The table below summarises the key rates for FY 2025-26.

For small companies (turnover under $20 million), the refundable offset means if your tax offset exceeds your tax liability, the ATO pays you the difference as a cash refund. This is particularly valuable for startups and early-stage companies that may not yet be profitable.

Large companies (turnover of $20 million or more) receive a non-refundable offset. This means the offset can only reduce your tax liability to zero but cannot generate a cash refund. Any unused offset can be carried forward to future years.

The base company tax rate for FY 2025-26 is 25% for base rate entities (companies with aggregated turnover under $50 million) or 30% for other companies. The R&D offset is calculated as the company tax rate plus the incentive percentage.

Eligible R&D Activities

To qualify for the R&D Tax Incentive, your activities must meet the strict definition of "core R&D activities" or "supporting R&D activities" under the Industry Research and Development Act 1986.

Core R&D activities involve experimental activities where the outcome is not known in advance. These activities must be conducted for the purpose of generating new knowledge (whether about a product, process, or service).

Examples of eligible activities include developing new manufacturing processes, creating novel software algorithms, designing and testing new medical devices, and developing new chemical formulations. The key factor is that the outcome cannot be determined in advance by a competent professional.

Supporting R&D activities are those directly related to core R&D activities. These include specialised testing, data analysis, and technical documentation directly connected to the core experimental work.

Ineligible Activities

Not all innovative work qualifies for the R&D Tax Incentive. The ATO and AusIndustry regularly review claims to ensure activities meet the legislative requirements.

The following activities are generally not eligible:

• Market research, market testing, or market development
• Routine data collection or quality control
• Style or cosmetic changes to existing products
• Commercial, legal, or administrative work
• Prospecting, exploring, or drilling for minerals
• Social science, humanities, or arts research

If your activity is considered "standard" in your industry and does not involve technical uncertainty, it is unlikely to be accepted as eligible R&D. The ATO focuses particularly on claims where the experimental method is not clearly documented.

How to Apply for the R&D Tax Incentive

Claiming the R&D Tax Incentive involves a two-step process with both AusIndustry and the ATO. You must complete both parts before the deadline to receive your offset.

Step 1: Register your R&D activities with AusIndustry. You must submit an online R&D Application through the Business Research and Innovation Initiative portal (formerly the AusIndustry portal). The deadline within 10 months after the end of your income year.

Step 2: Lodge your R&D Tax Offset claim with the ATO. Include the offset amount in your company tax return and attach a completed R&D Tax Schedule. If you use a tax agent, the deadline is usually 15 May following the end of the income year.

For FY 2025-26, companies with a 30 June balance date have until 30 April 2027 to register with AusIndustry. The ATO tax return deadline is typically 31 October 2026 (or 15 May 2027 with a tax agent).

Strategic Use of the R&D Offset for Business Growth

The R&D Tax Incentive can significantly reduce the cost of innovation. For a startup spending $100,000 on eligible R&D, a refundable offset of 43.5% means the effective cost is only $56,500 after the offset is received.

This cash injection can be reinvested into further R&D, equipment, or hiring additional researchers. Many Australian tech startups use the refundable offset as a key source of early-stage funding before they become profitable.

Use our take-home pay calculator to model how R&D expenditure affects your overall business position. For small businesses, also check our instant asset write-off calculator to see how equipment purchases can be claimed alongside R&D activities.

The offset interacts with other tax concessions like the salary sacrifice arrangements for R&D staff. Employee costs (salaries, on-costs, and employer super contributions) are typically the largest eligible expenditure in R&D claims.

Record-Keeping Requirements

Good documentation is essential for a successful R&D Tax Incentive claim. The ATO and AusIndustry can audit claims up to five years after lodgement, and poor records are the most common reason for claim adjustments.

You should maintain detailed records of your experimental activities, including project plans, laboratory notebooks, test results, and progress reports. Each activity should clearly document the technical uncertainty and the systematic approach used to resolve it.

Financial records must separately track all R&D expenditure, including wages, materials, contractor costs, and overheads. The ATO expects clear allocation methods that distinguish R&D from non-R&D expenditure.

Frequently Asked Questions

Can startups without revenue claim the R&D Tax Incentive?

Yes, pre-revenue startups can claim the R&D Tax Incentive. Small companies (turnover under $20 million) receive a refundable offset, meaning they can receive a cash refund even if they have no tax liability. This makes it one of the few government programs that directly funds early-stage innovation.

How long does an R&D Tax Incentive claim take to process?

AusIndustry typically processes R&D registrations within 28 to 60 days. ATO processing times vary, but most refundable offset claims are processed within 30 to 90 days after lodgement. Complex claims or those flagged for review may take longer.

Are software development activities eligible for the R&D Tax Incentive?

Software development can be eligible if it involves technical uncertainty and systematic experimentation. Routine software development using standard methods does not qualify. The ATO has published detailed guidance on software R&D, focusing on novel algorithms, new architectures, and resolving technical unknowns.

Can overseas R&D activities be claimed?

Overseas R&D activities are generally not eligible unless they are necessary for the Australian R&D activities and the overseas work cannot reasonably be conducted in Australia. A separate registration and approval process applies for overseas activities, and approval is rarely granted for standard offshoring arrangements.

What happens if the ATO disallows my R&D claim?

If the ATO disallows part or all of your R&D claim, you can object through the standard objection and review process. It is essential to have detailed technical and financial records to support your position. Many companies engage R&D tax specialists to prepare claims and manage any ATO reviews or audits.

Does the R&D Tax Incentive affect other business tax obligations?

The R&D offset is separate from your standard tax obligations. However, R&D expenditure claimed for the offset cannot also be claimed as a general deduction. Your overall taxable income and income tax position will reflect the net benefit of both the offset and the reduced deductions.