TLDR: The R&D Tax Incentive is run by two agencies. AusIndustry, on behalf of Industry Innovation and Science Australia (IISA), decides whether your activities meet the Division 355 definitions. The ATO decides which dollars are notional R&D deductions, what offset rate applies (43.5% for most companies under $20 million aggregated turnover), and whether the claim survives the integrity rules.
Who administers what
Two regulators, one program. AusIndustry assesses activity eligibility against Division 355 of the ITAA 1997, specifically the core R&D activity test in s 355-25. The ATO assesses expenditure: whether the amounts you notionally deduct against those registered activities are genuinely R&D expenditure, correctly apportioned and correctly rated.
Outside a formal finding on activities, neither agency defers to the other. A registration number from AusIndustry does not certify your expenditure, and an unchallenged tax return does not certify your activities.
That split explains most of the confusion founders hit at claim time. The narrative work and the numbers work answer to different rulebooks, and they run on different timelines.
The two-agency split in practice
| Function | AusIndustry / IISA | ATO |
|---|---|---|
| Registration of activities | Yes, via the online customer portal | No |
| Whether activities are core or supporting | Yes (s 355-25, s 355-30) | Can review where no finding exists |
| Whether expenditure is a notional R&D deduction | No | Yes |
| Offset rate and calculation | No | Yes |
| At-risk, feedstock, recoupment rules | No | Yes |
| Records supporting the activity narrative | Yes | Yes, for the expenditure nexus |
| Deadline | 10 months after year end | Company tax return lodgement |
| Reviews and findings | Activity findings | Risk reviews and audits |
| External merits review | Administrative Review Tribunal | Administrative Review Tribunal |
The Administrative Review Tribunal (ART) replaced the Administrative Appeals Tribunal in October 2024, so decisions from either agency ultimately land in the same forum.
What the ATO actually assesses
The ATO asks four questions of a claim: are you an eligible R&D entity, did you register the activities, are the amounts claimed notional R&D deductions properly connected to those activities, and does anything in the integrity rules reduce them. Activity eligibility is primarily AusIndustry's call, but where AusIndustry has made no finding the ATO can form its own view of whether the activities qualify, as the Tribunal confirmed in GQHC [2024] AATA 409. It also tests whether the claimed expenditure was actually incurred on the activities as registered.
Notional R&D deductions and the $20,000 minimum
"Notional" means the amounts are not deducted in the ordinary way. You remove them from your normal deductions and instead claim them in the R&D schedule, where they generate the offset.
You need at least $20,000 of notional R&D deductions in the income year. Two exceptions: amounts paid to a Registered Research Service Provider (RSP) that is not an associate, and monetary contributions under the Cooperative Research Centre program. Those are claimable regardless of amount.
If you spent $14,000 on in-house R&D and nothing with an RSP, there is no offset for that year.
The expenditure-to-activity nexus
Every dollar must tie to a specific registered activity. Not to the project, not to the team, to the activity as registered. In practice that means timesheet or time-allocation data, an apportionment method that separates R&D from non-R&D and core from supporting, and invoices allocated the same way.
This is where claims fail on the ATO side. In the ATO-cited Tier Toys and Ozone Manufacturing matters, the absence of contemporaneous records meant the taxpayers could not show the expenditure was anything more than a normal business expense. See our guide to record keeping requirements for the evidence set.
Eligible expenditure categories
Notional R&D deductions fall into four broad categories, each with its own apportionment logic. A fuller treatment sits in what R&D expenditure you can claim.
Salary, wages and on-costs
Salary and wages for time spent on registered R&D activities, apportioned by actual R&D time, plus associated on-costs such as superannuation and payroll tax on the R&D portion.
Apportionment has to be reasonable and supported. A flat "our engineers spend 60% of their time on R&D" with nothing behind it is the weakest form of the claim. Time records tied to specific activities are the strongest.
Contractor and associate payments
Contractor payments for R&D activities are claimable where the contractor performed registered activities for you and you bore the cost.
Associate payments carry a hard rule: amounts owed to associates must be paid in cash by the end of the income year. Accrual alone is not enough. A director's fee booked on 30 June and paid in August is not claimable in the earlier year.
Overheads and decline in value
Apportioned overheads directly related to the R&D are claimable, as is the decline in value of depreciating assets to the extent the asset was used for R&D activities. Both need an allocation basis you can state in a sentence and reproduce from records.
Overheads that commonly qualify include rent, utilities, cloud hosting, software licences, insurance and IT support attributable to the R&D activities.
Three allocation bases that tend to hold up:
- R&D labour hours or headcount. The most defensible basis for cloud spend, licences and IT support, because usage follows the people doing the work.
- Floor space. Reasonable for rent and utilities where an identifiable area is used for R&D, such as a lab, a test bench or a dedicated workspace.
- Direct measurement. Cloud accounts, environments or licence seats tagged to R&D workloads. Measured beats estimated every time.
Whichever basis you choose, apply it consistently across the year and document why it is reasonable. A method selected in April because it produces a better number is the first thing a reviewer will test.
For depreciating assets, claim the decline in value for the period and proportion it to the extent of R&D use, using the same effective life you apply for ordinary tax purposes. An asset used half the year on registered activities and half on production only generates a notional deduction for the R&D fraction.
Balancing adjustments apply when an R&D asset is sold, scrapped or otherwise disposed of, and can bring an amount back into assessable income. Flag disposals to your tax agent before the schedule is finalised.
Offset rates for FY2026
Rates below apply to income years commencing on or after 1 July 2021 and are current for FY2026. Which stream you fall into depends on aggregated turnover, not on revenue in isolation.
| Aggregated turnover | Offset | Rate |
|---|---|---|
| Under $20 million | Refundable | Company tax rate + 18.5 pp (commonly 43.5%) |
| $20 million or more | Non-refundable | Company tax rate + 8.5 pp up to 2% intensity, + 16.5 pp above 2% |
Refundable offset, turnover under $20 million
A base-rate entity at a 25% company tax rate gets 43.5%. Refundable means the offset is paid as cash to the extent it exceeds tax payable, which is what makes the incentive meaningful for pre-revenue companies.
Worked example: a loss-making software company with $500,000 of notional R&D deductions and no tax payable receives $500,000 脳 43.5% = $217,500 as a cash refund.
One exclusion: the refundable offset is not available where the company is controlled by income-tax-exempt entities.
Non-refundable offset and the two-tier intensity premium
At $20 million aggregated turnover or more, the premium depends on R&D intensity, calculated as notional R&D expenditure divided by total expenditure for the year. There are exactly two tiers, applied marginally.
- Notional R&D up to 2% of total expenditure: company tax rate plus 8.5 percentage points.
- The portion above 2%: company tax rate plus 16.5 percentage points.
Worked example: a company with $30 million aggregated turnover, $20 million of total expenditure, $2 million of notional R&D deductions and a 25% company tax rate (assuming it qualifies as a base rate entity). Intensity is 10%, and the two tiers together produce a total offset of $798,000, non-refundable, applied against tax payable with any excess carried forward. Our rebate calculation walkthrough shows the slice-by-slice working for both streams.
There has been no flat 38.5% non-refundable rate since 1 July 2021. If a calculator or adviser quotes one, the figure is out of date.
The $150 million expenditure cap
Notional R&D deductions above $150 million in an income year attract the offset at the company tax rate only, with no premium on the excess. The cap rose from $100 million to $150 million for income years starting on or after 1 July 2021.
Separately, the 2026-27 Budget proposes raising the $20 million refundable threshold to $50 million from 1 July 2028. It is exposure draft legislation (Treasury consulted from 10 to 28 September 2026), not yet law, and it does not affect current-year claims.
How do you claim the offset on your tax return?
The claim lives on the R&D tax incentive schedule lodged with your company tax return, with the resulting offset amount carried into the return itself. The schedule captures your AusIndustry registration number, the notional deductions by expenditure type, your intensity calculation where relevant, and any clawback or feedstock adjustments.
Your tax agent lodges the schedule and the return. AusIndustry registration is a separate, earlier lodgement through the business.gov.au customer portal.
Order of operations
- Conduct and document the R&D during the year, with contemporaneous records.
- Register the activities with AusIndustry within 10 months of year end (30 April for a 30 June year end). See registration deadlines.
- Receive the registration number.
- Calculate notional R&D deductions and apply the offset rate.
- Lodge the R&D tax incentive schedule with the company tax return.
Registration must precede claiming the offset. The 10-month window is a hard statutory deadline. Miss it and, absent a granted extension of time (available only in limited circumstances), the year's claim is lost regardless of how strong the underlying R&D was.
Integrity rules that reduce a claim
These provisions operate independently of whether the activity is eligible. They are the reason a registered activity can still produce a smaller claim than expected, and they are the ATO's main adjustment levers.
At-risk and conducted-for rules
You must be the entity for whom the R&D is conducted: effectively owning the results, controlling the activities, and bearing the financial burden. Expenditure guaranteed to be reimbursed regardless of results is not at risk.
Arrangements involving associated entities and foreign related entities are an active focus: Taxpayer Alert TA 2023/4 covers R&D delivered through associated entities, and TA 2023/5 covers R&D conducted overseas for foreign related entities.
Feedstock adjustments
Where R&D activities produce a marketable or applied output, the input and energy costs consumed in producing it are clawed back. This routinely reduces production-environment claims.
Recoupment and clawback
Government grants or other recoupments relating to the same R&D trigger a clawback adjustment, worked out in the R&D schedule. The principle is simple: you cannot receive both public funding and the full offset premium on the same expenditure.
A typical trigger is a program grant that reimburses part of the salary cost of a project whose hours are also in your notional R&D deductions. Program funding of the ARENA or CRC kind sits squarely in scope.
The adjustment does not disqualify the activities or the underlying expenditure. It reduces the net benefit on the funded slice, and it is calculated by your tax agent as part of the schedule rather than assessed by AusIndustry.
Two practical points. First, timing: a recoupment received in a later income year can still trigger an adjustment in the year it is received, even though the offset was claimed earlier. Second, evidence: keep the grant agreement, the milestone claims and a reconciliation that separates grant-funded from self-funded spend, because the calculation depends on matching the recoupment to the specific expenditure it relates to.
If a grant is in the pipeline while a claim is being prepared, tell whoever is compiling the numbers before lodgement, not after.
Associate payments
Amounts owed to an associate must be paid in cash by the end of the income year to be claimed in that year. Accrual is not enough. The deduction is generally deferred rather than lost: pay the amount in a later income year and it can usually be claimed then, provided the underlying activities were registered for the year the expenditure was incurred.
Both regulators read the same records
The ATO's expenditure review and AusIndustry's activity review draw on the same underlying documentation, just from different angles. AusIndustry asks whether the hypothesis, experiment, observation and evaluation are evidenced. The ATO asks whether the hours and invoices tie to those activities.
In GQHC [2024] AATA 409, covered in our ATO reviews and audits guide, the Tribunal held that hypotheses must be specific and capable of being validated or invalidated rather than commercial aims, and that maintaining adequate documentation is itself part of the systematic progression. The same records that satisfy that standard are the ones that support apportionment.
That is the practical case for building the claim from evidence created during the year rather than reconstructing it in April. Rand assembles both halves from the engineering record: the activity narratives for the AusIndustry registration form fields, and the time-allocation data that gives every claimed dollar a named activity behind it.
What to take into your next claim
Treat the ATO and AusIndustry as two separate reviewers with two separate questions, and build for both from the start of the income year. Register on time and apportion defensibly. Then apply the correct rate for your turnover band and keep the records that connect the two.
Rand builds the registration and the expenditure figures from the same evidence base. An Expert Reviewer finalises the registration, your company declares and submits it, and Rand's handoff letter gives your accountant the figures for the ATO schedule. For the full end-to-end picture, start with our complete guide to the R&D Tax Incentive. This article explains the rules and is not tax advice for your circumstances.