TLDR: The R&D tax offset is the benefit side of the R&D Tax Incentive. Under $20 million aggregated turnover it is refundable at the company tax rate plus 18.5 points, commonly 43.5%, and paid as cash where it exceeds tax payable. At $20 million or more it is non-refundable: plus 8.5 points on notional R&D up to 2% of total expenditure, plus 16.5 points above that. Registration is due 10 months after year end.
What the R&D tax offset is
The R&D tax offset is not a deduction. It is calculated on your notional R&D deductions for the year: the amounts you would otherwise have deducted for expenditure on registered R&D activities. Instead of deducting them, you claim the offset under Division 355 of the ITAA 1997.
Two agencies split the work. Industry Innovation and Science Australia and its delegates at AusIndustry decide which activities are eligible. The ATO administers the expenditure and the offset itself.
That split matters practically: a registration number does not guarantee the ATO accepts your expenditure, and clean expenditure records do not save an activity that fails the eligibility test.
Refundable versus non-refundable: the $20 million line
Aggregated turnover determines which offset you get. Under $20 million, the offset is refundable. At $20 million or more, it is non-refundable.
| Refundable offset | Non-refundable offset | |
|---|---|---|
| Aggregated turnover | Under $20M | $20M or more |
| Rate | Company tax rate + 18.5 pp | Company tax rate + 8.5 pp / +16.5 pp (intensity tiers) |
| Excess over tax payable | Paid as cash refund | Carried forward to future years |
| Typical claimant | Pre-revenue and growth-stage companies | Scaled and listed companies |
The refundable offset is not available if the company is controlled by income-tax-exempt entities. That catches some entities with university or government-linked ownership structures, so check control before assuming a cash refund.
The 2026-27 Budget proposes raising the $20 million threshold to $50 million from 1 July 2028. It is exposure draft legislation, not yet law, and it does not affect any income year you are currently claiming.
Current offset rates
For income years commencing on or after 1 July 2021, the rates below apply. There has been no flat 38.5% non-refundable rate since that date.
| Situation | Offset rate |
|---|---|
| Turnover under $20M, base-rate entity at 25% | 43.5% |
| Turnover under $20M, tax rate 30% | 48.5% |
| Turnover $20M+, notional R&D up to 2% of total expenditure | Company tax rate + 8.5 pp |
| Turnover $20M+, notional R&D above 2% of total expenditure | Company tax rate + 16.5 pp |
| Notional R&D above $150M in the year | Company tax rate only, no premium |
How the intensity premium works
R&D intensity is notional R&D expenditure divided by total expenditure for the income year. The premium is applied marginally, in the same way marginal income tax rates are. The higher 16.5 point premium applies only to the slice of notional R&D above the 2% intensity line, not to the whole amount.
Only two tiers exist. A three-tier premium appeared in a 2019 draft that was never enacted, and it still circulates in old commentary. Ignore it.
Worked examples at three company sizes
The three examples below use a base-rate company tax rate of 25% where turnover is low enough, and 30% for the large company.
Pre-revenue software startup. Aggregated turnover $2M, notional R&D deductions $400,000, tax losses for the year. The refundable offset is 43.5% of $400,000 = $174,000, paid as a cash refund because there is no tax payable to absorb it.
Scaled company at $30M turnover. Total expenditure $25M, notional R&D $2M, so intensity is 8%. The 2% intensity line sits at $500,000 of notional R&D.
- First $500,000 at 25% + 8.5 = 33.5%, giving $167,500.
- Remaining $1,500,000 at 25% + 16.5 = 41.5%, giving $622,500.
The total non-refundable offset is $790,000, an effective 39.5% on the $2M.
Large company at 30%. Total expenditure $200M, notional R&D $12M, intensity 6%. The first $4M (2% of $200M) attracts 38.5% = $1,540,000. The remaining $8M attracts 46.5% = $3,720,000. Total $5,260,000, an effective rate of about 43.8%.
A company that spends a large share of total expenditure on R&D lands close to the refundable rate; a low-intensity claimant sits near the tier-one rate (33.5% at a 25% tax rate, 38.5% at 30%).
Effective rates rise with intensity; for the step-by-step method, see how to calculate your R&D tax incentive rebate.
Eligibility gates before the offset applies
The offset rate is the easy part. The offset only applies to expenditure on activities you have registered and that genuinely satisfy the statutory test, and eligibility is self-assessed per activity, never per project or per product.
Registered activities under s 355-25
A core R&D activity under s 355-25(1) is an experimental activity whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience. The outcome can only be determined by a systematic progression of work based on principles of established science: hypothesis, experiment, observation and evaluation, leading to logical conclusions.
The activity must also be conducted for the purpose of generating new knowledge. Both limbs have to be satisfied, not one or the other.
The knowledge standard is worldwide. New to your company is never enough. In Absolute Vision Technologies [2022] AATA 2319, a decisive finding was the absence of any literature review demonstrating a knowledge gap existed at all.
Section 355-25(2) lists activities that can never be core, including market research and market testing, activities associated with complying with statutory requirements or standards, reverse engineering, and software developed for the dominant purpose of internal administration by the entity or a connected or affiliate entity, under paragraph (h). Some can still be supporting activities, but only if they are directly related to a core activity and undertaken for the dominant purpose of supporting it.
Read core versus supporting R&D activities and the full eligibility test before you assume expenditure is claimable.
The $20,000 minimum
You need at least $20,000 of notional R&D deductions in the income year to access the offset. Two exceptions: amounts paid to a Registered Research Service Provider, and monetary contributions under the Cooperative Research Centre program, are claimable regardless of amount.
The $150 million cap
Notional R&D deductions above $150 million in an income year attract the offset at the company tax rate only, with no premium at all. The cap rose from $100 million for income years starting on or after 1 July 2021. It affects very few claimants, but it is a hard ceiling on the premium, not on the deduction.
Expenditure that feeds the offset
Notional R&D deductions are built from a defined set of expenditure types tied to registered activities.
- Salary and wages for time spent on R&D activities, apportioned by actual R&D time, plus on-costs.
- Contractor payments for R&D activities.
- Associate payments, which must be paid in cash by year end, not merely accrued.
- Apportioned overheads directly related to the R&D.
- Decline in value of depreciating assets, to the extent the asset is used for R&D.
Apportionment is where most claims are won or lost. A percentage applied to a whole engineering team without a time-based source is the pattern the ATO looks for.
In Tier Toys and Ozone Manufacturing, the absence of contemporaneous records meant the taxpayers could not show the expenditure was anything more than normal business expenses.
More detail sits in what R&D expenditure can you claim.
What reduces the offset
Several integrity rules cut the amount before you get to the rate.
| Rule | Effect |
|---|---|
| At-risk rule | Expenditure you are not genuinely at risk on is excluded |
| Conducted-for rule | You must bear the financial risk and hold rights to results |
| Feedstock adjustment | Value of goods produced during R&D is added back |
| Recoupment / clawback | Government grants funding the same expenditure trigger a clawback |
| Overseas activity | Offshore R&D requires an Overseas Finding from AusIndustry |
The overseas rule is the one that surprises people most. An Overseas Finding application is due by the end of the income year in which the overseas activity starts. Extensions are granted only in limited circumstances, so treat the deadline as fixed.
Arrangements involving associated entities and foreign related entities are active ATO risk areas: 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.
How to claim: registration, then tax return
Two agencies, fixed order: AusIndustry first, then the ATO.
- Register the activities with AusIndustry through the online customer portal, within 10 months of the end of the income year. The form is a field-by-field questionnaire structured as projects, then core activities, then supporting activities. Each core activity is split across separate fields (sources investigated, why a competent professional could not know the outcome, hypothesis, experiment, evaluation, conclusions, new knowledge), each with its own character minimum.
- Lodge the R&D tax schedule with your company tax return, prepared by your tax agent, using the registration number issued by AusIndustry.
Registration must precede the claim. See registration deadlines and the registration form field guide.
Rand builds the registration from your engineering and clinical evidence, your team reviews it, an Expert Reviewer finalises it and your company declares and submits it, which keeps the narrative and the expenditure tied to records made at the time.
Timing and cash flow
For a 30 June year end, registration is due 30 April. The refund arrives after the company tax return is lodged and processed, not on registration.
That means the gap between spending the money and receiving the offset can be well over a year. Plan runway on that basis rather than on the notional 43.5%.
Common mistakes with the offset
- Quoting 38.5%. That flat non-refundable rate has not existed since 1 July 2021. Use the two-tier intensity calculation.
- Applying the higher premium to the whole claim. The 16.5 point premium applies only to the portion above 2% intensity.
- Assuming a refund with turnover at or above $20M. The non-refundable offset carries forward; it does not pay cash.
- Treating a commercial goal as a hypothesis. In GQHC [2024] AATA 409, vague commercial hypotheses failed, and observation and evaluation had to be evidenced rather than asserted.
- Writing the narrative after year end. In Absolute Vision Technologies, documents prepared later for internal review were not contemporaneous and did not match the registered activities.
- Forgetting associate payments must be paid in cash by 30 June to be claimable.
Where the rules are heading
One dated change is already law: for income years starting on or after 1 July 2025, activities related to gambling or tobacco cannot be core or supporting R&D activities, unless conducted for the sole purpose of harm minimisation. The 2026-27 Budget package is proposed, not law. Among other measures, it would raise the refundable turnover threshold from $20 million to $50 million and each offset premium by 4.5 points from 1 July 2028; Treasury consulted on exposure draft legislation from 10 to 28 September 2026.
Neither changes the rates for the years most companies are claiming now. Track its progress in our Budget and policy coverage rather than assuming a change has taken effect.
The offset itself is arithmetic. Getting it right depends almost entirely on whether the activities behind it hold up under s 355-25 and whether the expenditure ties back to contemporaneous records. If you want that evidence trail assembled as the work happens rather than reconstructed in April, that is the problem Rand was built to solve.