The at-risk rule and government recoupment in the R&D Tax Incentive

If your business receives a government grant and also claims the R&D Tax Incentive, the at-risk rule and the clawback adjustment could materially change what you end up with. The interaction is not always intuitive, but it is one of the first things an experienced R&D adviser will ask about when they look at your funding structure.

This article is general information only. It is not tax, financial, or legal advice. Every business circumstance is different, and the rules can shift between income years. Before you lodge a claim or rely on any figure here, you must confirm your position with a registered tax agent or accountant who knows your books. The Australian Taxation Office publishes detailed guidance that you should always refer to for the current income year.

At GrantsMAX, we help Australian businesses discover the government grants and R&D tax incentives they may be eligible for, and we prepare a complete, evidence-backed application from their own accounting data, for their registered accountant to review and lodge. We do not lodge, file, or guarantee any outcome. The business owns the claim, and the registered tax agent is the one who signs off.

If you’re already familiar with the basics of the R&D Tax Incentive, you may want to refresh with our plain-English guide before diving into the at-risk rule. If you’re new to grants, you can also read about how the GrantsMAX platform continuously scans and matches government grants and R&D incentives to your business profile.

Prerequisites: what you need before you start

Before you examine whether a clawback adjustment might apply to your claim, make sure you have these building blocks in place:

• A registered R&D entity. Your company must be an eligible entity that has registered its R&D activities with AusIndustry for the income year. Registration happens through the R&D Tax Incentive customer portal, and it must be completed within 10 months of the end of your income year. Without a valid registration, no offset can be claimed.
• Clear records of core and supporting R&D activities. You should have contemporaneous documentation (experiment logs, design files, test results, meeting minutes) that shows how a systematic, experimental approach was applied to generate new knowledge. This underpins your activity narratives.
• A detailed schedule of R&D expenditure. Break the costs down into the categories that the ATO recognises: employee salaries, contractor spending, consumables, and appropriate overhead allocations. If you use accounting software like Xero, you can connect it read‑only through the GrantsMAX browser connector so the platform can extract and categorise your R&D spending.
• A list of every government grant or recoupment you have received or are entitled to receive for those R&D activities. Include federal programs, state innovation grants, and any other funding that relates to the same work.

Pro tip: Don’t wait until the end of the financial year to map out your grants. When you first receive a grant, note down the name of the program, the funding agreement, and which R&D activities it targets. That saving of an hour now can save days of back‑counting later.

Step 1: Understand what the at-risk rule means for your R&D claim

The at-risk rule is embedded in Section 355-405 of the Income Tax Assessment Act 1997. In plain language, it says that an R&D entity can only claim the tax offset for expenditure that it actually bears the financial risk of. If someone else, a government, a customer, a grant body, effectively pays for the R&D, the part they funded is not considered “at risk” and cannot attract the full tax benefit.

The logic is sound: the R&D Tax Incentive is designed to encourage businesses to invest their own capital in uncertain, experimental work. If a government grant already covers the cost, the incentive would otherwise be a double‑dip. The at-risk rule works to prevent that.

This principle has been applied by the ATO for years, but it took on sharper form after the 2021 legislative amendments and the ATO’s finalised guidance on the at-risk rule. PwC’s analysis highlights that the Commissioner now has a clearer framework for determining whether a recoupment has occurred and how much of the expenditure is considered funded.

When you are looking at your R&D budget, ask: did we receive any government assistance for these specific activities? If the answer is yes, you need to move to the next steps.

Step 2: Recognise when government recoupment triggers a clawback

Government recoupment is a broad concept. It includes not just upfront cash grants, but also:

• Reimbursement‑style programs where you invoice the government for approved spending;
• Forgivable loans that only need to be repaid if the project commercialises;
• In‑kind support from a government body that reduces your direct R&D costs;
• Certain export market development grants that fund the same technical work you claim as R&D.

The key test is whether the payment is directly connected to the R&D activities. General business support or a one‑off cash boost that isn’t tied to specific R&D expenses may not be recoupment, but the ATO will look at the substance of the arrangement, not just the label on the program.

Two federal programs that often appear in these discussions are the Industry Growth Program and the Accelerating Commercialisation grant. If you receive funding from either for R&D activities, the clawback provisions almost certainly apply. The same holds for state‑level innovation grants from the Victorian, NSW, or Queensland governments; always check the funding agreement for a recoupment clause.

Warning: Receiving a grant does not automatically disqualify your entire R&D claim. It only triggers a clawback on the portion of expenditure that the grant covered. You can still claim the offset on the remaining, at‑risk expenses. But poor record‑keeping can make it hard to prove the split.

Step 3: Calculate the notional deduction under the at-risk rule

Before you calculate a clawback, it helps to understand the notional R&D deduction, the starting point. While the R&D Tax Incentive is delivered as an offset, the underlying mechanism is a notional deduction that reduces your taxable income. For an entity with aggregated turnover below $20 million, the offset is refundable; for those above $20 million, it is non‑refundable and carries forward. Those thresholds are set in tax law but are subject to change, so confirm the current levels with the ATO.

Here is how the notional deduction is built:

1. Gather eligible R&D expenditure, labour, materials, contractor fees, and a reasonable allocation of overheads.
2. Remove any expenditure that is not at risk, i.e. the amount funded by a recoupment. This gives you your “net at‑risk R&D spend”.
3. Apply the relevant R&D tax offset rate. For refundable offset entities, the rate is 43.5% (verify for your income year). For non‑refundable, the rate is 38.5% for the first $100 million of eligible expenditure, and 30% above that. Again, verify rates.
4. The resulting figure is your R&D tax offset before any clawback adjustment.

Keep in mind that the notional deduction is a concept used for calculation; the actual offset amount may be further modified by a clawback, as we discuss next.

Step 4: Determine the clawback amount if you receive a grant

The clawback adjustment is set out in Section 355-445 of the Income Tax Assessment Act 1997. Its job is to recapture part of the tax benefit you would otherwise receive on the grant‑funded R&D. The amount you repay, called the clawback amount, is included in your assessable income in the year you lodge your R&D claim.

According to the ATO’s clawback guidance, the clawback is calculated differently for refundable and non‑refundable offset entities:

• For a refundable offset entity (typically with aggregated turnover below $20 million), the clawback amount is 10% of the recoupment that related to R&D expenditure.
• For a non‑refundable offset entity, the clawback is 30% of the recoupment.

Example (refundable): If you receive a $100,000 government grant for eligible R&D activities and you are a refundable entity, the clawback would be $10,000. That $10,000 is added to your assessable income. You still get the R&D tax offset calculated on the remaining at‑risk expenditure.

These percentages are law, but legislation can change. Bulletpoint’s article on the clawback adjustment provides a good worked illustration if you want to see a mock calculation with real numbers.

It is important to note that the clawback applies in the same income year as the R&D claim, not when you received the grant cash. This can create a timing mismatch that affects your cash flow. If you received the grant in a prior year but only claim the R&D offset this year (perhaps because your product development cycle spans multiple years), you still recognise the clawback now.

Pro tip: Run a clawback simulation before you sign a grant agreement. Know exactly what the net cash outcome will look like after both the grant and the tax clawback. A grant of $200,000 that triggers a $20,000 tax clawback still leaves you $180,000 ahead, but if the grant terms require you to spend on overheads that aren’t fully R&D‑eligible, the real net benefit can be thinner than it appears.

Step 5: Manage catch‑up deductions for R&D expenditure in future years

Sometimes, your R&D expenditure is not fully claimable in the year you incur it. This can happen if you didn’t register the activities in time, or if you later discovered that some work qualified as core R&D but went unclaimed. The tax law allows a catch‑up deduction under certain conditions so that the notional R&D deduction is brought forward to the current year.

The ATO’s clawback page explains that if you have an amount that becomes assessable because of a clawback, you may be able to claim an additional deduction for the same amount in your next income year, essentially smoothing out the hit. This is the catch‑up mechanism.

But there are strict rules:

• The expenditure must have been eligible R&D expenditure in the earlier year.
• The catch‑up only applies where the earlier expenditure would have been deductible had the notional R&D deduction rule not applied.
• You need records that clearly link the earlier expenditure to the clawback amount.

This area is where a tax agent’s judgement is vital. Incorrectly claiming a catch‑up deduction can draw unwanted ATO attention. In our experience at GrantsMAX, the businesses that stay ahead of this are the ones that connect their accounting data regularly. When your Xero, MYOB or QuickBooks transactions flow through the GrantsMAX platform, it becomes much easier to isolate which grant receipts correspond to which R&D activities, and to tag everything for the accountant who will review the claim.

Step 6: Document everything for substantiation and compliance

With the at-risk rule and clawback, record‑keeping is not a nice‑to‑have; it is the only way to survive an ATO review. The Australian Taxation Office expects you to be able to demonstrate:

• The calculation of your R&D expenditure, broken down by activity;
• The connection between the grant funding and the specific R&D activities;
• The at‑risk amount (total eligible spend minus the recoupment);
• The clawback calculation.

We recommend a simple folder structure per income year:

1. R&D Activity Register, a spreadsheet or tool that lists each activity, its start/end dates, and a description of the systematic experimentation.
2. Expenditure Ledger, the cost breakdown, tied to your accounting system.
3. Grant Agreements, copies of signed funding agreements, highlighting the R&D activities they fund.
4. Clawback Working Paper, a page showing the recoupment amount, the applicable clawback percentage, and the resulting assessable income inclusion.

If you’re working with a registered tax agent, they will expect these documents. A sloppy paper trail is often why legitimate R&D claims are reduced on review. At GrantsMAX, our system prepares an evidence‑backed pack that reconstructs these documents from your actual accounting data, so your accountant can review and lodge with confidence. We do not lodge the claim, the registered tax agent does.

Pro tip: Tag every grant receipt in your accounting software with a unique identifier that maps back to your R&D activities. If you receive $45,000 from the Accelerating Commercialisation grant for prototype testing, create a tracking code for “AC‑Proto‑FY24”. This makes the clawback calculation trivial at year‑end.

Step 7: Plan your R&D claims with grant funding in mind

The best time to manage the at‑risk rule is before you incur the expenditure. When you are putting together your R&D roadmap and considering which grants to apply for, build in a tax clawback scenario. Here’s a planning sequence:

1. Estimate total R&D spend for the income year.
2. Map eligible R&D activities against the expenditure.
3. Identify which grants are live and whether they will fund R&D. The GrantsMAX discovery engine can help you see state and federal grants ranked by fit for your business.
4. Model the net offset after grant recoupment. If you’re a refundable entity, for every dollar of grant that funds R&D, you lose 10 cents of tax offset. For non‑refundable, it’s 30 cents. The economics may still favour taking the grant, especially if the grant fills a cash‑flow gap that lets you continue R&D.
5. Decide which entity will hold the grant and which will claim the R&D offset, in a group structure, careful placement can sometimes optimise outcomes (your tax agent can advise on the integrity rules here).
6. Document the at‑risk split from day one of the project.

Swanson Reed’s practitioner guide includes a helpful step‑by‑step planning model that many accountants use when they advise clients who are stacking grants and the R&D Tax Incentive. While specific advice must come from your own registered tax agent, reading such guides can help you ask better questions.

Warning: Do not structure your R&D project primarily to manipulate the clawback. The ATO’s general anti‑avoidance provisions can apply to schemes that lack commercial substance. If the arrangement looks artificial, the Commissioner may disregard it entirely. Always ground your planning in real commercial intent.

Bringing it together: a worked planning example (simplified)

Imagine a software startup with an aggregated turnover of $5 million. It plans to spend $400,000 on eligible R&D this income year. It has won a $150,000 government grant that specifically funds the experimental software development work.

• Total eligible R&D spend: $400,000
• Less: recoupment (grant): $150,000
• At‑risk R&D spend: $250,000
• R&D Tax Offset (refundable, 43.5% on $250,000): $108,750
• Clawback (10% of $150,000 recoupment): $15,000 added to assessable income

The startup still receives a significant offset, but the grant reduces the pool of at‑risk expenditure and triggers a modest clawback. If they had not planned for the $15,000 assessable income inclusion, they might be surprised at tax time. Running this model early gives the founder a clear picture.

This example uses a well‑established tax offset rate, but always confirm the rate that applies to your income year. The ATO publishes current rates.

How GrantsMAX helps streamline this process

GrantsMAX connects read‑only to your business’s Xero, MYOB, QuickBooks, Microsoft 365, or Google Workspace. Once connected, the platform:

• Discovers the government grants and R&D tax incentives your business may be eligible for;
• Identifies grant receipts in your bank feeds and matches them to the program;
• Drafts the activity narratives and cost schedules that support your R&D claim;
• Spots potential clawback exposures so you and your accountant can address them before lodgement.

The output is a complete, evidence‑backed pack that your registered tax agent reviews, refines, and lodges. You own the claim. There is no ATO double‑dip: the pack simply gives your accountant a clear starting point, supported by real data.

We built GrantsMAX for Australian business owners and their advisers precisely because the interaction between grants and the R&D Tax Incentive is too easy to miscalculate in a spreadsheet.

Key takeaways

• The at‑risk rule means you can only claim the R&D Tax Incentive on expenditure you bear the financial risk of. Government funding reduces that at‑risk pool.
• A clawback adjustment applies when a grant recoups your R&D costs: 10% of the recoupment for refundable offset entities, 30% for non‑refundable entities (verify annually).
• The clawback amount is included in your assessable income in the year you claim the offset, not when you receive the grant.
• Catch‑up deductions may allow you to spread the clawback impact into a future year, but strict conditions apply.
• Contemporaneous records, linking each grant to specific R&D activities, are your best defence during an ATO review.
• Always confirm the current rates, thresholds, and legal provisions with the ATO and your registered tax agent. This article is general information only, not advice.

If your business is undertaking eligible R&D and you want a prepared pack that your accountant can review and lodge, complete with a clear handling of grant interactions, join the GrantsMAX waitlist or book a walkthrough with our team. We’ll show you how it works.