This article is for directors of Australian companies who have looked at the R&D Tax Incentive at some point, decided it probably was not for them and moved on. It explains the five reasons businesses most often rule themselves out, which of those reasons are valid and the actual tests that decide R&D tax eligibility.
In the claims we assess, we see more companies wrongly exclude themselves from the program than wrongly claim under it. The compliance risks around over-claiming are real and receive plenty of attention. Businesses that could legitimately qualify can go unexamined.
Reason one: “We are not a research company”
Eligibility depends on whether you carried out eligible activities, whether you are the right kind of entity and whether you spent enough on them. You must be a corporation, so the entity test can rule a business out immediately.
The ATO’s guidance on eligibility for the R&D Tax Incentive is clear on this. Individuals, corporate limited partnerships and exempt entities cannot claim, and trusts are generally not R&D entities. If you run your business through a discretionary trust, you have a structural issue worth knowing about well before the year in which you want to claim.
Manufacturers, food producers, agricultural businesses and engineering companies claim regularly, because eligibility comes back to the activities themselves.
Reason two: “We did not spend enough”
Notional deductions on eligible R&D activities need to be at least $20,000 for the year. Below that, the program is closed to you with limited exceptions, and the threshold is lower than many owners expect.
Owners often think of R&D spend as the money that went out the door to a lab or a contractor. The largest input in many claims is the salary cost of their own people, and you can apportion those costs to the time people genuinely spent on eligible work. A single developer or process engineer spending a meaningful part of the year on qualifying activity can take a business past $20,000 without any external invoice at all.
That apportionment is difficult to reconstruct convincingly two years later, which is why the useful work happens at the start of the income year.
Reason three: “The benefit is not worth the effort”
The numbers are the best way to assess this, and there are two offsets to consider. If your aggregated turnover is under $20 million and income tax exempt entities do not control you, you may be entitled to a refundable offset. The offset is equal to your company tax rate plus an 18.5% premium, which can come back as cash for a company in a loss position.
Everyone else gets a non-refundable offset at the company tax rate plus a two tier premium, set by how R&D intensive you are. The premium is 8.5% on R&D expenditure up to 2% of your total expenditure for the year. It rises to 16.5% on R&D expenditure above that 2% line.
The offset rate drops back to the plain company tax rate on notional deductions above $150 million in a year. That is not a problem most readers of this article will have. The ATO sets all of this out on its page covering the rates of R&D tax incentive offset.
To make that concrete, a base rate entity paid company tax at 25% in the 2025-26 income year. A refundable claimant at that rate is looking at 43.5% of eligible expenditure. You can scope the work involved in advance, and our R&D Tax Incentive calculator will give you a sense of the number before you commit anyone’s time to the exercise.
Reason four: “We use contractors and overseas developers”
Using contractors can still qualify, with eligibility depending on where the activity takes place. Generally only R&D activities conducted in Australia qualify, while activities conducted overseas require an overseas finding from the Department of Industry, Science and Resources.
That finding confirms that the activities meet the conditions in the relevant legislation. It is a formal process with its own timing, and you need to consider it before the year has closed.
Software businesses run into this more than most, because an offshore development team is now a completely ordinary way to build a product. The important thing is to know which side of the line each piece of work sits on while the work is happening. This is one of the recurring themes in our software development R&D work.
Reason five: “We missed the deadline once, so it is closed”
Registration is annual and each year stands on its own. You must register your activities with the Department of Industry, Science and Resources for every income year you want to claim.
You need to do this within 10 months of the end of your company’s income year and before claiming the offset in your company tax return. For a business with a 30 June year end, that is 30 April.
Missing one year does not prevent you from registering for the next one, so it is worth looking at each income year on its own facts. You also need to register before the claim goes into the return, which catches out businesses that lodge early.
What actually decides R&D tax eligibility
The company must meet the R&D entity definition and carry out activities that satisfy the legislated tests for core or supporting R&D activities. You must conduct those activities for the company in Australia, unless an overseas finding applies. Your notional deductions must reach the $20,000 floor and you must register in time.
Failure doesn’t disqualify a claim – an experiment that resolves genuine technical uncertainty by showing an approach that did not work, can still produce new knowledge.
The activity definition is where most of the real judgement sits, and it deserves its own treatment. Our companion piece works through what counts as R&D without the jargon. Our wider R&D Tax Incentive advisory work covers the sector specific questions that sit beyond the general tests.
Before you rule yourself out again
If you decided against this program more than two years ago, the rates, your business and the activities it carries out may all have changed. It is worth looking at the current facts before assuming the earlier decision still applies.
Start with a short and honest conversation about what your people actually worked on this year and whether any of it meets the tests. It is also worth being selective about who you take advice from, which is why we published our view on how to choose an R&D adviser.
Book a call at pp.tax/contact/ and we will give you a straight answer on your R&D tax eligibility, including a clear no if that is the honest one.
