Whether or not you can claim the R&D tax offset depends largely on whether the activities you are claiming are eligible as either core or supporting R&D activities.
NB: as a general rule only activities conducted in Australia qualify, however, there are some exceptions. Check our post about R&D Advance and Overseas Findings if your research is conducted overseas.
Core R&D activities
Core R&D activities are experimental. That means you can’t actually know the answer to the question without going thru a scientific process.
That experiment must be based on the principles of science and use the scientific method i.e. go through each step from a hypothesis, experiment, observation and evaluation, logical conclusion.
That means if you are conducting research to prove what you already know, not what you hypothesise, it probably doesn’t qualify as a core R&D activity.
The purpose of Core R&D activities is to generate new knowledge e.g. improved materials, products, devices, and services.
When you are determining your eligibility think about these four questions:
1. Was an experiment or set of experiments completed?
2. Were the experiments done using the scientific method?
3. Was the purpose of the experiment to generate new knowledge?
4. Could the outcome of the experiment have been known or determined before the experiment?
Can I claim for activities that are part of normal production?
Short answer – yes. A core R&D activity can be undertaken as part of a normal production run as long as the other criteria apply.
For example: if your experiment is to determine the most robust material available to produce a certain product, then you can use live production runs to run the experiment. They will be eligible for the tax incentive up until the point when your new knowledge is generated i.e. when you have ascertained the best material.
Supporting R&D activities
The definition of supporting R&D activities is “activities directly related to the core R&D activities.”
So, define your core activities first and then find the other activities that support the core activity. Directly related simply means there is a close and relatively immediate relationship with the core R&D activities.
If the supporting activity produces or is directly related to producing goods and services, the activity is only considered a supporting R&D activity if its “dominant purpose” is supporting the core R&D activity, not the production of the good and/or the service per se.
Remember the tax incentive is to encourage research and development, not to subsidise the creation of goods and services.
However, just because something has a commercial objective doesn’t mean it can’t also be a supporting R&D activity.
To determine eligibility companies need to consider:
- the extent to which the supporting R&D activities also achieve commercial outcomes
- the importance of those non-R&D outcomes.
I.e. are the commercial outcomes a by-product of the supporting R&D activity or is the R&D outcome a by-product of the commercial/production outcomes? What is the “dominant purpose”?
If this seems ambiguous to you, we can help determine which of your activities may be eligible under the scheme. Contact us for a no obligation chat about your circumstances. Let’s make sure you make the most out of your potential eligibility.
