This is a question about money rather than eligibility. The activities have to qualify first: compute only counts when it was used on registered core or supporting activities. Once they do, the work is in apportioning the bill reasonably and keeping the records that support it. Under s 355-205 of the Income Tax Assessment Act 1997, expenditure is a notional deduction to the extent it is incurred on registered R&D activities, so the share is part of the entitlement, not an afterthought.
The two bases for a cloud bill
Rand proposes cloud and model API spend on a direct basis, at a stated share, in one of two ways.
A tagged cost report. Where accounts, projects, environments or API keys are set up per purpose, the share is whatever the report shows for resources used on the registered experiments. A non-production environment can count in full only when it exists for those experiments and the evidence shows it.
Non-production share times R&D share. Where the report only separates production from everything else, one possible proxy is the non-production share multiplied by the engineering team's R&D share, with both inputs recorded. Non-production on its own is not R&D: staging and test environments also host routine QA, demos, customer onboarding and support. The proxy is not a safe harbour. It assumes compute in shared environments tracks engineers' time, so check it against what run logs show; if experiments used the GPUs far more, or far less, than the hours suggest, the proxy does not reasonably reflect actual use and a different basis is needed.
Other contemporaneous records, such as experiment logs, can support a reasonable estimate where neither fits. What never works is defaulting a shared cost to 100%. Whatever basis you adopt, document it when you adopt it and apply it consistently from year to year.
What usually stays out
- Production hosting. Serving customers is not an R&D activity. Experiments run in production must meet the same eligibility rules, and only their share counts; see performance and scale engineering.
- Credits. Usage covered by provider credits incurred no expenditure.
- Interest, which s 355-225 excludes, and the cost of preparing tax returns, which the ATO lists among expenses that cannot be claimed.
Edge cases peculiar to compute
- Owned versus rented GPUs. Renting GPU time is an expense. A purchased server is a depreciating asset, claimed as its decline in value for the period and extent of R&D use. The R&D figure is worked out under Division 40 as if the small business simplified depreciation rules did not exist (s 355-310(4)), so an instant write-off or small business pool deduction is not the R&D amount; the server's decline over its effective life is. The ATO also says no notional deduction is available once an asset has been pooled for working out tax deductions for depreciating assets, or allocated to a low value or small business pool after the R&D rules have applied to it. That is the tax treatment the accountant elects, not how the asset is grouped in the accounting books, so settle the treatment of R&D servers with the accountant before any tax pooling or write-off.
- Prepaid commitments. The ATO says the prepayment rules can apply to expenditure for services provided over a period, which affects committed-spend and reserved capacity deals.
- Model API spend. Treated like compute; separate keys for experiment traffic give the cleanest record. Training-heavy work is discussed under LLM fine-tuning.
- The threshold. Total notional deductions must be at least $20,000 for the year. Below that, s 355-100(2) keeps the offset only for amounts paid to a registered Research Service Provider that is not an associate, for services within a field it is registered for, and for CRC contributions; see the $20,000 minimum.
Who confirms the figure
The company self-assesses, and its accountant or tax agent decides what goes in the R&D schedule and the tax return. What helps the accountant most is a basis written down when it was adopted, with its inputs, the cost reports behind it and the run logs that show the proxy, if one was used, matches actual use. For a sense of what the eventual offset might be worth, try the R&D Tax Incentive calculator.
The guide to what R&D expenditure you can claim covers the other cost types, and how to calculate the offset shows the arithmetic.