What R&D Expenditure Can You Claim in Australia?

TLDR: You can claim salaries and on-costs for time on registered R&D activities, contractor and associate payments, apportioned overheads, and decline in value of assets used for R&D. Everything must trace back to registered activities, and you generally need at least $20,000 in notional R&D deductions for the year. The hard parts are apportionment, the cash rule for associates, and the Overseas Finding requirement for offshore work.

What counts as R&D expenditure

Eligible R&D expenditure is the cost of the activities you have registered with AusIndustry as core or supporting R&D activities, nothing more and nothing less. Two agencies decide the outcome. AusIndustry (as delegate of Industry Innovation and Science Australia) decides which activities qualify under s 355-25 of the ITAA 1997. The ATO decides which expenditure attached to those activities is claimable.

That order matters. There is no such thing as eligible expenditure sitting on top of ineligible activities. If a workstream is routine build rather than experimental work, no amount of clean payroll data makes its cost claimable.

Claimable amounts are called notional deductions. They are not extra deductions: you remove them from your ordinary deduction claim and claim them under the R&D provisions instead, which is what generates the offset. The ATO's research and development tax incentive guidance sets out how the schedule works, and your tax agent lodges it.

There is also a floor. You generally need at least $20,000 in notional R&D deductions for the income year to claim the offset. The threshold does not apply to expenditure paid to a Registered Research Service Provider or to monetary contributions under the Cooperative Research Centre program.

Eligible expenditure categories at a glance

Salaries, wages and on-costs

Salaries are usually the largest line in a software or health-tech claim, and the most scrutinised. You claim the portion of each person's remuneration that corresponds to time spent on registered R&D activities, plus the on-costs that sit on that portion.

The claim is per person, per activity, per period. A blanket "engineering is 70 percent R&D" figure applied across the whole team is the fastest way to lose a claim on review.

How to apportion salary by R&D time

1. Map each registered core and supporting activity to the work that actually delivered it (tickets, branches, experiment logs, trial protocols).
2. Establish each person's R&D time share for the period from records made at the time, not from a year-end estimate.
3. Apply that share to salary and on-costs for the same period, so a mid-year hire or a change in role is reflected.
4. Exclude time on excluded categories and on routine work, even where the person is otherwise heavily R&D-weighted.
5. Retain the underlying source, not just the summary spreadsheet.

Timesheets are the cleanest evidence, but they are not the only acceptable one. Engineering systems produce a contemporaneous record of who worked on what and when, and that record is normally more reliable than a retrospective allocation.

Rand builds the expenditure apportionment from that evidence trail (GitHub, Jira and time logs) so the labour split matches the registered activities rather than being reverse-engineered from payroll totals.

What on-costs can be included

On-costs follow the salary they attach to. That typically includes superannuation contributions, annual and long service leave amounts actually paid during the year (accrued but unpaid leave provisions are generally not deductible until paid), payroll tax, and workers compensation premiums, apportioned on the same R&D percentage as the base salary.

Fringe benefits tax and directors' fees need care and depend on how the amounts are treated for tax generally. Recruitment fees, training and staff amenities are not part of on-costs but may be claimable as overheads if they are directly related to the R&D.

Founders and working directors

Founder time is claimable to the extent it is paid as salary or director's remuneration through payroll and relates to registered R&D activities. Unpaid sweat equity is not expenditure, so there is nothing to claim.

Dividends and trust distributions are not salary and are not claimable. If a founder is also an associate receiving payments through another entity, the associate rules below apply instead.

Founders also tend to have the most mixed roles: fundraising, sales and admin sit alongside genuine technical or clinical work. A defensible founder percentage is usually lower than the team average and needs the same contemporaneous support.

Contractor payments

Contractors are the second biggest line in most claims, and the one where the arrangement itself can disqualify the spend. Payments for work on registered R&D activities are claimable at the amount you incur, apportioned where the contractor also does non-R&D work.

What matters is the substance of the arrangement, not the label on the invoice. Two conditions do the heavy lifting: you must be the entity conducting the R&D for its own benefit, and you must bear the financial risk.

The at-risk and conducted-for rules

The R&D must be conducted for you. You need to bear the financial risk of the work and hold the rights to exploit the results. Where a contract shifts risk to the developer or vests results elsewhere, the expenditure may not be claimable by you at all.

This is an active ATO risk area for arrangements involving foreign parents, related entities and contract research organisations, addressed in Taxpayer Alerts TA 2023/4 and TA 2023/5. If your development or clinical work is contracted through a group entity or performed for an overseas parent, that arrangement should be assessed on its terms before you build the schedule around it.

Invoices should describe the work in enough detail to link it to a registered activity. "Development services, March" supports nothing.

Overseas contractors and the Overseas Finding

Expenditure on R&D activities conducted outside Australia is only claimable if AusIndustry has granted an Overseas Finding covering those activities. There are three substantive requirements: a significant scientific link to an Australian core activity, a reason the activity cannot be conducted in Australia (such as a patient population that is unavailable here), and overseas expenditure that stays below the related Australian expenditure.

The application deadline is unforgiving. It must be lodged by the end of the income year in which the overseas activity starts, which for a 30 June year end means 30 June, not the following 30 April.

An overseas contractor working on an Australian core activity is a different question from an activity conducted overseas, and the distinction turns on where the work is physically performed. Get advice on borderline cases before you commit to a structure.

Associate payments and the cash rule

Payments to associates are claimable only if they are actually paid in cash by the end of the income year. An accrual, a journal entry, a loan account credit or a set-off does not count for that year.

Associates include directors, shareholders and their related entities, and entities under common control. The rule catches a very common startup pattern: a founder's service company invoices the operating company, the amount sits unpaid in intercompany accounts, and the claim is built on the accrual.

If the amount is not paid by 30 June, you do not lose the deduction permanently. The expenditure becomes claimable in the later income year in which it is actually paid, provided the activities were registered for the year the expenditure was incurred.

Note that if you instead deduct the amount under the ordinary deduction provisions in the year it is incurred, you cannot later claim it as a notional R&D deduction when paid. Plan cash movements before year end rather than after.

Overheads and apportionment

Overheads are claimable to the extent they are directly related to the registered R&D activities and apportioned on a reasonable basis. The test is a genuine connection to the R&D, not general business support.

Which overheads are directly related

Typical claimable overheads for a software or health-tech company include:

• Rent, electricity and internet for space occupied by R&D staff
• Cloud infrastructure and compute used for development, testing and experimentation
• Software licences and subscriptions used by the R&D team (repositories, CI, data tooling, statistical software)
• Consumables and materials used in experimental work
• Ethics committee fees, trial site costs and participant reimbursements for a clinical stream

Production hosting that serves paying customers is generally not R&D expenditure. Where the same account covers both, split the environments and claim only the development and experimental portion.

Choosing a defensible apportionment method

Pick one method per cost type, base it on something you already measure, and use it consistently across the year and across years.

Document the method when you adopt it, including why it is reasonable and what data supports it. Changing method mid-year to improve the outcome is a review trigger. So is a percentage that stays identical for three years while the team composition changes.

Decline in value of depreciating assets

You can claim the decline in value of a depreciating asset for the period, and to the extent, it is used for registered R&D activities. That apportioned amount becomes a notional deduction in place of the ordinary depreciation deduction for that portion.

For most software companies this is a small line: laptops, test devices, lab or measurement equipment, servers. For a device or diagnostics company it can be material.

Buildings and capital works are excluded. Assets acquired but not yet used in the R&D produce no claim until they are used.

What you cannot claim

The exclusions are as important as the inclusions when you build the schedule.

• Interest (as defined for withholding tax purposes) incurred to fund the R&D
• Expenditure on acquiring or licensing core technology
• Buildings and capital works (a separate deduction regime applies)
• Expenditure not at risk, including amounts you are guaranteed to recover
• Amounts covered by the feedstock rules where R&D inputs produce marketable output, which reduce the notional deduction
• Overseas activity expenditure without an Overseas Finding
• Associate amounts not paid in cash by year end
• Costs of activities that fall in the excluded categories, such as market research or work whose dominant purpose is complying with a statutory standard, unless the activity qualifies as a registered supporting activity conducted for the dominant purpose of supporting a core R&D activity

Government grant funding also interacts with the claim through the recoupment and clawback rules, which can increase your tax liability where the same expenditure is both grant-funded and claimed.

From expenditure to offset: a worked example

Once the schedule is built, the offset depends on your aggregated turnover. Companies under $20M get the refundable offset at the company tax rate plus 18.5 percentage points, commonly 43.5 percent for a base-rate entity taxed at 25 percent.

Take a company with $18M aggregated turnover and the following notional deductions:

At 43.5 percent, that produces a $261,000 refundable offset, payable as cash to the extent it exceeds tax payable.

Companies at $20M turnover or more receive a non-refundable offset on an intensity basis, covered in our complete guide to the R&D Tax Incentive.

Records are what make the schedule stand up

The expenditure nexus fails without records made at the time. In Tier Toys and Ozone Manufacturing, both cited by the ATO, the absence of contemporaneous records meant the taxpayer could not show that the claimed amounts were anything more than normal business expenses.

The same principle sank the activity side in Absolute Vision Technologies [2022] AATA 2319, where documents prepared after the fact for an internal review were not treated as contemporaneous and did not match the registered activities. A schedule reconstructed in April for a year that ended in June is exposed on both fronts.

Registration is due 10 months after year end, which is 30 April for a 30 June year end, and registration must precede claiming the offset. See our guide to R&D deadlines and the evidence expectations in contemporaneous evidence for a defensible claim.

AusIndustry's own program overview covers the registration mechanics that sit in front of all of this expenditure work.

Rand assembles the expenditure schedule from the same engineering and time records that support the registered activities, so the labour split, the overhead basis and the activity descriptions tell one consistent story. That consistency is what a reviewer is actually testing.