The R&D Tax Incentive is Australia’s flagship government funding program to support homegrown innovation. The Organization for Economic Co-operation and Development (OECD) says it’s one of the most generous R&D incentive programs in the world. [1] But despite the financial leg up, Australian investment in research and development (R&D) has been declining since the GFC and plunged to its lowest level for two decades in 2022. [2]
Today, Australian innovation stands at a crossroads. The Federal Government is powering forward with a once-in-a-generation review of R&D in Australia. Its goal is to reverse the long-term decline and reshape our R&D systems to maximise social and economic benefits for Australia. So we’re considering the outcomes (actual and potential) of the R&D review, and how it already has and potentially could impact the R&D Tax Incentive. We’re also exploring what businesses, eligible for the R&D refund or offset, should do to support their innovation while the government’s review is underway.
Pulse check on Australia’s R&D
In 2022, Australia’s gross domestic expenditure on R&D (GERD) reached a 20-year low of 1.66% [3] — more than an entire percentage point off the OECD country average of 2.7%. [4] Troublingly, this was no outlier but part of a long-term trend since 2009. Despite the Albanese Government’s election promise to return Australia’s GERD to 3%, its push to do so has sputtered and stalled.
More R&D funding needed
Although there have been annual increases in government investment in R&D, including the 4.7% increase for the current financial year, they haven’t been enough to turn the tide. [5] And by 2024, Australia had dropped out of the Nature Index Research Leaders’ Top 10 countries for R&D, slipping to 12th position globally. [6] In the same year, university spending on R&D, as a share of GDP, recorded its biggest two-year decline in more than 30 years. [7] While at first glance that may not seem massively consequential, it is for two reasons. Universities are where most blue-sky research happens, which lays the foundations for other innovations. And they’re an important source of spin-out start-ups.
Innovation globally is shifting gears
If that wasn’t concerning enough, the 2020s are shaping up to be a defining decade for innovation. Recent breakthroughs in AI, quantum computing, biotechnology and greentech are on the cusp of multiple paradigm shifts in innovation, across multiple sectors. And if Australia doesn’t lift its game, our nation faces being left behind and potentially unable to catch up. For more information on why this particular point in time is so significant for R&D, read our article, The innovation themes of 2024 set to shape 2025.
All eyes on R&D and the R&D Tax Incentive
At the end of last year, the Federal Government unveiled its Strategic Examination of Research and Development. It was prompted by a sustained decline in Australia’s innovation performance, and a forecast GERD of 1.3% by 2035 if current trends continued. [8] Led by Robyn Denholm, Chair of Tesla, the review of Australian R&D will run throughout 2025 and generate intervention options to reverse the downward trajectory. The announcement of the R&D review follows hot on the heels of the Federal Government’s first annual R&D Tax Incentive Transparency Report 2021-22 which was released in October 2024. [9] The report pulled back the curtain on the entities claiming the R&D Tax Incentive — the government’s leading vehicle for supporting Australian R&D.
Transparency outcomes
The R&D Tax Incentive Transparency Report revealed 11,545 companies claimed the R&D Tax Incentive during the 2021-22 income year. And these claims related to R&D expenditure totalling $11.2 billion. However the report didn’t divulge the amount each R&D entity received, or whether it was refundable or non-refundable. But it did contain some surprising insights. It turns out gambling behemoth Tabcorp and supermarket giant Coles are major beneficiaries of the R&D Tax Incentive. [10] The fallout from the report has been swift. Experts called for a smarter use of the incentive program to encourage more business investment that will shift the needle for Australia on economic growth, social benefits and productivity. And the Federal Government listened, announcing exclusions to the R&D Tax incentive scheme eligibility for tobacco and gambling entities in the December Mid-Year Economic and Fiscal Outlook.
Policy reset
Many commentators, including Professor Chennupati Jagadish, President of the Australian Academy of Science, have welcomed the Strategic Examination of Research and Development. The Academy has been calling for a review of the nation’s R&D systems since 2018, framing the government’s review as an opportunity to build an R&D system for Australia that’s fit for purpose.[11] Research by CSIRO into the impacts of R&D investment found that $1 of R&D investment in Australia creates an average of $3.50 in economy-wide benefits in today’s dollars, and a 10% average annual return. [12]
Strategic R&D investment
With bang for buck like that, it’s no wonder that the Federal Government is focused on maximising Australian R&D. We don’t have a crystal ball. But it’s possible — following the recent move on tobacco and gambling — that we could see further tweaks to the R&D Tax Incentive, favouring R&D that benefits Australia holistically. The four-member expert review panel features top-flight academic achievers such as Emeritus Professor Ian Chubb AC and Professor Fiona Wood AO. Their recommendations on how to boost Australian R&D are as yet unknown. But we could see proposals that promote greater collaboration and cooperation between research entities and industry.
The R&D Tax Incentive explained
The R&D Tax Incentive has been around since 2011 and is designed to fund R&D that otherwise might not happen without it. In a nutshell, the incentive has two components. It features a refund of up to 18.5% above your company’s company tax rate. Most businesses that qualify for the R&DTI refund are base-rate entities paying the 25% company tax rate. So eligible businesses with aggregated annual revenues of up to $20 million and a minimum R&D investment of $20,000 can expect to receive 43.5 cents on the dollar.
Businesses with aggregated annual revenues of $20 million and above can apply for a tax offset instead. Tax offsets are calculated using R&D expenses as a percentage of the company’s total expenses. So, businesses with an R&D intensity of 0-2% receive an intensity premium of 8.5 percentage points above their company tax rate. And companies with an R&D intensity rate of 2% or more receive an intensity premium of 16.5 percentage points above their company tax rate. In addition to your company’s aggregated annual turnover, being an eligible entity with eligible R&D is crucial if your business wants to apply for support under the R&DTI program or unlock other funding sources such as R&D financing.
Consistent capital for R&D all year round
If you’re looking for consistent capital to fund your R&D — and most businesses with innovation programs are — then the R&D Tax Incentive is a great place to start. The only downside is that it takes up to 18 months to arrive. But R&D financing fills that lacuna by letting you access your refund early, and repay it with your expected R&DTI refund when it arrives. So that solves that issue. The pressing matter is with generous refunds and rebates up for grabs, how do you maximise your R&D Tax Incentive claim to ensure you’re not leaving money on the table?
Finding funding
After almost eight years of providing $850 million plus in R&D financing to hundreds of businesses, and helping them access their R&D tax refunds early, we’ve pretty much seen it all. In our experience, the new year is when businesses doing R&D tend to zero in on the R&D Tax Incentive in a host of different ways. Some businesses want to register for the R&DTI and access it early to unlock a new funding source. Other businesses, that are already registered for the R&DTI and are eligible for the refund, want to access six months of their accrued refund with R&D financing to fast-track their R&D investment in H2.
Either way, whether the business is new to the R&DTI and R&D financing or not, we see companies accessing their refunds in different ways. Some businesses seek a one-off burst of capital, while others draw down multiple advances strategically throughout the year for consistent capital that also grows their final refund. Whatever you do, there are some golden rules for maximising your refund. So, let’s unpack these key steps and top tips. While these focus on the R&D Tax Incentive refund, the information on eligible entities applies if your company’s R&D is eligible for the offset.
1. Company structure counts
Some businesses fall at the first hurdle in their quest to access R&D Tax Incentive support because only certain types of businesses are eligible to apply in the first place. If you’re an individual sole trader or have a corporate limited partnership, are exempt from tax or a trust, you can’t apply. Only businesses that are incorporated are eligible and specific rules apply for entities that are incorporated under foreign law. For more information, read our article Could the R&D Tax Incentive superpower your business?
2. Get the right advice
The R&D Tax Incentive is a self-assessment program. Ultimately, you need to make the call on whether your business and your R&D are eligible. But that doesn’t preclude you from taking advice. And if you’re considering R&D financing, then you will need to enlist the help of an R&D tax consultant. So we strongly recommend seeking out the best available advice. Over our years in R&D lending, we’ve seen expert advice being the difference in claim sizes, audits and being able to claim at all. By all means, keep your local, general accountant for general accounting and bookkeeping help. But with a generous R&D tax refund on the line, make sure you engage an expert R&D Tax Adviser. Read our article, Three golden rules for choosing an R&D tax consultant for more information.
3. Remember record-keeping
Record-keeping is an absolute must for a successful R&D Tax Incentive claim and will support you if your claim is audited in a spot check. You need to keep records about your core R&D and your supporting R&D activities for your claim. And the records that the Australian Tax Office rates most highly are contemporaneous ones. These are records that you make around the time you plan and conduct your R&D activities. For more information about the type of evidence and records you need to gather and the permissible format, read our article, Contemporaneous records and the RDTI: what you need to know.
4. Reinvest in more R&D
If you can, reinvesting in more R&D is a goal to add to your venture’s list for 2025. A cash-flow-friendly way to do this is by accessing your R&D refund early with R&D finance. This not only accelerates your R&D program but can also increase the size of your R&D refund. Depending on how you use your R&D financing, reinvesting it all in R&D every quarter can boost your R&D expenditure by 50% without your business having to stump up additional capital. For more information, read our article, Funding your innovation: Which R&D financing model suits your business goals?
Flow-on benefits of the R&D Tax Incentive
The benefits of the R&D Tax Incentive are many. It’s a tax refund that becomes your money to spend as you like in your business. So that means you can add it to your bootstrapping fund or use it to apply for matched funding. Australia’s R&DTI refunds and offsets have been a driving force for innovation, reshaping our world and lives since 2011. Could the R&D Tax Incentive transform your innovation, and help your business change the world this year? Make sure you’re maximising your refund by following our tips and advice. After all, we’re at the start of one of the most transformative periods for innovation in recent times. And a tidy R&D refund could help your business be part of it and shape the future.
[1] Pattens. (2024). World’s No.1? Australia R&D Tax Incentives Are Most Generous. [online] Available at: https://pattens.com/insights/aus-rd-tax-incentives-most-generous/.
[2] Crew, B. (2024). Australia must boost R&D investment to reclaim global research standing. [online] Nature . Available at: https://www.nature.com/articles/d41586-024-03637-2
[3] Statista. (n.d.). Top countries by R&D expenditure as a share of GDP worldwide 2020. [online] Available at: https://www.statista.com/statistics/732269/worldwide-research-and-development-share-of-gdp-top-countries/.
[4] OECD. (n.d.). Gross domestic spending on R&D. [online] Available at: https://www.oecd.org/en/data/indicators/gross-domestic-spending-on-r-d.html.
[5] Ministers for the Department of Industry, Science and Resources. (2024). Govt R&D up, overall R&D needs uplift: New report | Ministers for the Department of Industry, Science and Resources. [online] Available at: https://www.minister.industry.gov.au/ministers/husic/media-releases/govt-rd-overall-rd-needs-uplift-new-report
[6] Nature Index. (2024). Nature Index 2024 Research Leaders: India follows in China’s footsteps as top ten changes again. [online] Available at:Nature Index. (2024). Nature Index 2024 Research Leaders: India follows in China’s footsteps as top ten changes again. [online] Available at: https://www.nature.com/nature-index/news/nature-index-research-leaders-india-follows-china-footsteps.
[7] Hendry, J. (2024). Record low R&D spending growth in higher education. [online] InnovationAus.com. Available at: https://www.innovationaus.com/record-low-rd-spending-growth-in-higher-education/
[8] Hendry, J. (2024). R&D spend needs to ‘at least double’, Robyn Denholm says. [online] InnovationAus.com. Available at: https://www.innovationaus.com/rd-spend-needs-to-at-least-double-robyn-denholm-says/
[9] Office;, T. (2024). R&D tax incentive transparency reports | Australian Taxation Office. [online] Ato.gov.au. Available at: https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/incentives-and-concessions/research-and-development-tax-incentive-and-concessions/research-and-development-tax-incentive/r-d-tax-transparency-reports
[10] Brookes, J. (2024). Australia’s biggest R&D companies revealed. [online] InnovationAus.com. Available at: https://www.innovationaus.com/australias-biggest-rd-companies-revealed/
[11] Science.org.au. (2024). A rare opportunity to shape the R&D system so it is working for Australians | Australian Academy of Science. [online] Available at: https://www.science.org.au/news-and-events/news-and-media-releases/a-rare-opportunity-to-shape-the-rd-system-so-it-is-working-for-australians
[12] CSIRO (n.d.). Quantifying Australia’s returns to innovation. [online] www.csiro.au. Available at: https://www.csiro.au/en/work-with-us/services/consultancy-strategic-advice-services/CSIRO-futures/Innovation-Business-Growth/Quantifying-Australias-returns-to-innovation.