R&D notional deductions explained

Notional deductions: the R&D amounts the offset is calculated on

Notional deductions are the amounts the R&D tax offset is calculated on: spending on registered R&D activities, decline in value of assets used for R&D, earlier-year associate amounts once paid, R&D partnership asset decline and CRC contributions. They are notional because they are not deducted as ordinary expenses; they only set the offset.

Reviewed by George WalchFacts last verified 24 October 2026

Example

For example, an illustrative company pays $300,000 in salaries, 60% of it for time on registered activities, so $180,000. It adds $40,000 of contractor fees for those activities and the R&D share of a test server's decline in value: $6,000 a year, used 80% for R&D, so $4,800. Interest on its loan is excluded. Its notional deductions are $224,800. As a base rate entity under $20 million turnover, its offset at 43.5% is $97,788.

Legislative reference: Sections 355-100(1), 355-105 and 355-205, Income Tax Assessment Act 1997

Related terms: minimum expenditure threshold, associate payments, decline in value, at risk rule, refundable offset, expenditure cap

The offset is not a deduction. Division 355 builds a separate pool of "notional" deductions, multiplies it by the offset rate, and otherwise ignores it for income tax.

What goes into the pool

Section 355-100(1) totals amounts from five provisions:

Section 355-205: expenditure incurred in the year on registered R&D activities, such as salaries apportioned by R&D time, contractors and directly related overheads. Amounts owed to an associate count only once paid.
Section 355-305: decline in value of tangible depreciating assets, to the extent used for R&D (see decline in value).
Section 355-480: an earlier year's associate expenditure, in the year it is finally paid (see associate payments).
Section 355-520: decline in value of R&D partnership assets.
Section 355-580: contributions to a Cooperative Research Centre.

Prepaid amounts fall into the year the prepayment rules allow (section 355-110). Each amount needs a link to a registered activity. The ATO expects timesheets or a reliable substitute for salaries, and a defensible basis for apportioning everything else.

What stays out

Section 355-225 excludes building costs, interest, core technology, and the purchase price of tangible depreciating assets (their decline in value is claimed instead). Section 355-405 removes expenditure that is not at risk, such as amounts covered by a guaranteed return, which is the at-risk rule.

How the pool is used

The total decides two things. It must be at least $20,000, or only amounts paid to a registered Research Service Provider that is not an associate, and CRC contributions, count (see minimum expenditure threshold). Above $150 million, the excess earns only the company tax rate. In between, the rate depends on turnover. Try your own figures in the R&D Tax Incentive calculator; compute bills are a frequent line item, covered on cloud compute costs.

Frequently asked questions

Can we deduct R&D salaries as ordinary expenses instead?

Generally no. Under section 355-715, expenditure that gives the company an R&D offset cannot be deducted under any other provision, and the ATO says choosing not to claim it does not reopen the ordinary deduction. The exceptions are narrow: an associate amount unpaid at year end can take the ordinary route instead (see associate payments), and the non-R&D share of an asset's decline in value stays ordinarily deductible.

Do notional deductions have to reach $20,000?

For a full claim, yes. Below $20,000 the offset is still available on amounts paid to a registered Research Service Provider that is not an associate, and on CRC contributions, but nothing else.

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.