At-risk rule for R&D expenditure, defined

The at-risk rule: R&D spend someone else is guaranteed to cover is not claimable

The at-risk rule stops a company claiming R&D expenditure to the extent that it, or an associate, received or could reasonably expect consideration as a result of incurring it, whatever the R&D's results. If that consideration equals or exceeds the spend, nothing is claimable; if it is less, the claim falls by that amount.

Reviewed by George WalchFacts last verified 24 October 2026

Example

An illustrative company spends $150,000 on battery chemistry research. A state voucher scheme it applied to before starting refunds 40% of eligible research spend once the work meets reporting standards, whatever the results. It can reasonably expect $60,000 as a result of the spend, so its notional deduction falls to $90,000. Had the voucher been announced only after the spend, the at-risk rule would not apply, though clawback might.

Legislative reference: Income Tax Assessment Act 1997, s 355-405 (expenditure not at risk); ATO ruling TR 2021/5

The offset rewards companies for spending their own money on uncertain work. Section 355-405 removes it where the money is not really at risk, because the company or an associate gets something back for spending it, however the experiment turns out.

The two tests

TR 2021/5 splits the rule into two questions, both asked at the time the expenditure is incurred:

Nexus to expenditure. Has the company or an associate received, or could it reasonably expect, consideration as a direct or indirect result of incurring the spend?
Regardless of results. Is that consideration payable whatever the R&D activities produce?

If both are met, the consideration is compared with the spend. Equal or more, and the whole amount is denied; less, and the deduction is reduced by the consideration. Consideration can be non-monetary. The ruling also shows the other side: where a customer buys an existing product under a separate deal that does not depend on the company doing the R&D, there is no nexus between that payment and the R&D spend, so the rule does not reach it.

Where it bites

Contract development where a client pays a fixed fee for the work, whatever the outcome.
Domestic intercompany arrangements that reimburse cost plus a margin. Section 355-405(4) switches the rule off for work that meets the foreign-resident or permanent establishment exceptions to the conducted-for rule; see companies with an overseas parent.
Guaranteed returns, indemnities and subsidies tied to the spend, including those paid to an associate.

At-risk or clawback?

Read the funding agreement against both tests. Funding the company had, or could reasonably expect, when it spent the money engages the at-risk rule if it flows from incurring the spend and is payable whatever the results; a grant paid only if the research achieves set results may fail the second test. TR 2021/5 (Example 3, paras 58 to 63) adds that a subsidy announced and applied after the spend is outside the rule, though it may be a recoupment handled by clawback. Grant-funded clinical trials often need both checked.

Frequently asked questions

Does a customer paying for a product built with R&D make the spend not at risk?

Not automatically. The question is whether the payment comes as a result of incurring the R&D spend and regardless of the R&D's results. TR 2021/5 works through several contract examples, including fixed and variable fees, prepayments and instalments.

Is a repayable loan consideration?

A loan facility is non-monetary consideration, but TR 2021/5 values an arm's length, full recourse loan the company expects to repay at nothing for this rule, because the repayments equal or exceed the benefit. A related party non-recourse loan gets a separate example.

The R&D Tax Incentive is a self-assessment program. This page is general information, not tax, legal or financial advice; eligibility depends on your circumstances and you should seek independent advice for them.