Depreciation of assets used in R&D activities

Introduction

For many Australian businesses undertaking research and development, the R&D Tax Incentive can meaningfully reduce the after-tax cost of innovation. One area that often creates confusion is how to handle the assets used in your R&D activities, equipment, machinery, software, and in certain circumstances even portions of a building. Under the program, you may be eligible to claim a notional deduction for the decline in value (commonly called depreciation) of those assets. This is not a separate cash payment; rather, it is an allowable deduction that reduces your taxable income and can improve your R&D tax offset position, potentially generating a refundable offset for smaller companies.

Across our work at GrantsMAX, we see business owners and their accountants wrestling with the complexity of asset depreciation for R&D. Our job is to help you prepare a thorough, evidence-backed application pack straight from your own accounting data, so your registered tax agent can review, refine, and lodge the claim knowing the foundation is solid, while you always remain the owner of the claim. This guide walks through the mechanics in a step-by-step format, drawing on official ATO and AusIndustry guidance. Remember, this is general information only and does not constitute tax, financial, or legal advice. Always confirm your specific circumstances with a registered tax professional.

If you are new to the R&D Tax Incentive, a good starting point is our plain-English guide on What is the R&D Tax Incentive?. To see how GrantsMAX discovers grants and incentives from your Xero, MYOB, or QuickBooks data, visit our homepage.

Prerequisites for claiming depreciation on R&D assets

Before you can include a decline-in-value deduction in an R&D tax claim, a few foundational pieces must be in place:

• Valid R&D activities: Your business must be conducting eligible R&D activities as defined by AusIndustry and the ATO. Generally, these are core R&D activities that are experimental and whose outcome cannot be determined in advance based on current knowledge, or supporting activities that are directly related and undertaken for the dominant purpose of supporting a core activity. If your activities do not meet the eligibility criteria, you cannot claim depreciation on the assets used. The Eligibility Assessment & Risk Flags feature of GrantsMAX can help you surface areas of risk before you proceed.
• AusIndustry registration: You must register your R&D activities with AusIndustry within 10 months after the end of the income year in which the activities were conducted. Late registration can mean losing the entire incentive for that year.
• Reliable asset and depreciation records: You need a complete fixed asset register showing purchase dates, costs, effective lives, and depreciation methods. If you use cloud accounting software such as Xero, MYOB, or QuickBooks, GrantsMAX can connect to your read-only data to extract and structure this information, one of the strengths of the GrantsMAX for founders and CFOs offering.
• Understanding of ‘notional deduction’: The R&D Tax Incentive allows you to claim a notional deduction for the decline in value of a tangible depreciating asset that you own and use for R&D purposes. Even if you do not normally claim depreciation (for instance, because the asset is fully written off for accounting purposes), a notional deduction may still be available. But the calculation rules are specific and are closely watched by the ATO.

With these prerequisites satisfied, you can move through the following steps.

Step 1: Identify the assets used in your R&D activities

Your first practical task is to list every depreciating asset that is used, or has been used, in your R&D. This can include:

• Laboratory and testing equipment
• Pilot plants, prototypes, and experimental apparatus
• Computers, servers, and networking gear used for simulation, data processing, or software development
• Depreciable software licences
• Vehicles used directly in R&D (uncommon but possible)
• Fit-out items in dedicated R&D spaces
• In certain circumstances, a proportion of a building used as an R&D facility

The common thread is that the asset must be used for the purpose of carrying on an eligible R&D activity. If an asset serves multiple purposes, you will apportion its usage later (Step 4).

Pro tip: Walk through your fixed asset register and flag any items that have been tagged to R&D projects, even loosely. In a manufacturing plant, agtech facility, or software development house, a surprising number of assets may be partially used for R&D.

Warning: Do not assume an asset qualifies simply because it is new or technologically advanced. The ATO looks at the actual use, not the potential. General office furniture, administrative computers, or assets used exclusively for production or sales are unlikely to be eligible. The ATO’s own page on Expenditure you can claim provides examples of qualifying and non-qualifying assets.

Academic research has explored how firms allocate depreciation to R&D. One study analysed the proportion of firm-wide depreciation attributable to long-lived R&D assets, highlighting the value of careful attribution. While that research uses international data, the principle holds: precise identification is the first step.

Step 2: Determine whether the assets are used for core or supporting R&D

The R&D Tax Incentive distinguishes between core and supporting activities, and the treatment of asset depreciation depends on this classification. Core activities must satisfy the statutory test: they are experimental activities whose outcome cannot be known or determined in advance on the basis of current knowledge, and they are conducted for the purpose of generating new knowledge. Supporting activities are those that have a direct, close, and relatively immediate relationship with a core activity.

Assets used in core activities may be fully attributable to the R&D claim, subject to apportionment if they also serve non-R&D purposes. For assets used in supporting activities, however, the bar is higher. According to AusIndustry guidance, the asset must be used predominantly (more than 50%) for the supporting activity, and the supporting activity itself must be for the dominant purpose of supporting a core R&D activity.

Example: A 3D printer used to produce experimental prototypes as part of a core manufacturing R&D project could be fully eligible. If the same printer is used only to print jigs and fixtures for the production line (a supporting activity), you would then need to assess whether that supporting activity meets the dominant purpose test. If the supporting activity is not eligible, the asset’s depreciation may not be claimable.

While the Australian definitions are unique, the distinction between qualifying and non-qualifying expenditures is a common thread in global R&D incentives. A KBKG analysis of U.S. qualifying activities shows a similar emphasis on direct use. For Australia, however, you must rely solely on AusIndustry and ATO guidance.

Pro tip: Document the specific purpose of each asset in your R&D plan or project documentation. This will help you, and, later, your accountant or the ATO, understand why a particular asset was essential to the experiment.

Step 3: Calculate the decline in value (depreciation) correctly

Once you have identified the assets and their R&D purpose, you need to calculate their decline in value for the income year. The ATO recognises two methods for depreciating assets:

1. Prime cost method (straight line): The decline in value is spread evenly over the effective life.
2. Diminishing value method: A higher deduction in the early years, declining over time.

For general tax purposes, you can usually choose either method. But under the R&D Tax Incentive, the notional deduction must be calculated using the prime cost method, regardless of the method you use for your normal tax depreciation. This rule is set out in the ATO’s Expenditure you can claim guidance, which you should review for the income year in question. For example, even if you claim depreciation on a piece of equipment at 30% diminishing value in your tax return, the R&D notional deduction will be based on a straight-line calculation over the asset’s effective life.

Effective life: You must determine the effective life of each asset in accordance with ATO schedules. The ATO publishes effective life tables for various asset categories; you may self-assess an effective life if you have evidence to support a different period, but the ATO can challenge your assessment. A reasonable and consistent approach is critical.

Broader accounting perspectives on depreciating assets used for R&D can also be helpful. The Embark blog discusses best practices in R&D cost allocation, though your Australian claim must always follow the ATO’s specific requirements. Similarly, the U.S. approach to amortising R&D costs under Section 174, as explained by Thomson Reuters, may offer general conceptual background but does not apply here.

Temporary full expensing and other government measures can also affect how you treat assets. When such measures are in place, they may interact with the R&D notional deduction; you should discuss this with your tax agent, as the rules can be complex and subject to year-by-year adjustments.

Warning: Avoid double-counting. The R&D notional deduction is not an extra deduction on top of whatever you already claim for depreciation; it is an alternative calculation that feeds into your R&D offset. Your registered tax agent will ensure the tax position is correct.

Step 4: Apportion depreciation between R&D and non-R&D use

Most assets are not used exclusively for R&D. The ATO requires that you apportion the decline in value on a fair and reasonable basis between R&D use and other use. For instance, if a laboratory oscilloscope is used 60% of the time for eligible R&D experiments and 40% for routine product testing (which may not be eligible R&D), only 60% of the notional deduction can be included in your R&D claim.

The ATO accepts several apportionment methods:

• Time-based (e.g., hours recorded in timesheets or usage logs)
• Output-based (e.g., volume of R&D output vs. non-R&D output)
• Area-based (for buildings, floor area of the R&D zone)

You must keep detailed records to support your chosen method (see Step 5). A reasonable estimate may be acceptable, but only if you can demonstrate the underlying basis with contemporaneous documentation.

Pro tip: Set up a simple usage log or use project tracking codes in your accounting software from the start. If you use Xero tracking categories or MYOB jobs, GrantsMAX can read these data points to help build an evidence trail, a key input to our Audit-Ready Evidence Trail feature.

International comparisons can illustrate how seriously tax authorities treat apportionment. Bloomberg Tax provides a comprehensive look at U.S. R&D credit rules, which also require allocation. But the ATO’s expectations are explicit: you must be able to show the nexus between the asset and the R&D activity. Vague percentage allocations without backing will not survive a review.

Step 5: Maintain rigorous records to support your claim

Substantiation is the backbone of a defensible R&D claim, and asset depreciation is one of the most scrutinised areas. The ATO can review your claim up to four years after lodgement and will ask for evidence that the assets existed, were used in R&D, and were depreciated correctly. The records you should keep include:

• Purchase invoices and contracts for the assets
• Asset register entries showing cost, effective life, and depreciation method
• Usage logs, project plans, and test records that show when and how the assets were used for R&D
• Calculations for the notional deduction, including your apportionment workings
• Any documentation that links the asset to a specific, registered R&D activity

What the ATO expects: Contemporaneous records, those created at the time the work was performed, carry the most weight. The ATO’s guidance on record keeping for the R&D Tax Incentive is clear: reconstruction after the fact is risky.

The U.S. perspective also highlights this. A SourceAdvisors article on non-qualifying activities emphasises that even if an asset is used in R&D, poor documentation can undermine the credit. The same principle applies in Australia.

How GrantsMAX can assist: When you use GrantsMAX, our AI scans your connected accounting data, emails, invoices, and timesheets to construct a supporting-evidence index. It ties each asset and cost line to its source, building a clear audit trail. The pack is then handed off to your registered tax agent through our Accountant Review & Lodge Workflow, where they can add notes, request more evidence, and prepare for lodgement. This does not remove your responsibility to keep good records, but it can dramatically reduce the time and stress of pulling everything together.

Warning: If you cannot substantiate the depreciation claim, the ATO may disallow the entire deduction and potentially impose penalties. Over-documenting is far safer than under-documenting.

Step 6: Include the notional deduction in your R&D Tax Incentive claim

Once you have calculated the decline in value for each eligible asset, you include it as part of your aggregate notional R&D deductions when lodging your company tax return and R&D schedule. The process involves:

• Totalling all eligible notional deductions (asset depreciation, eligible R&D labour, consumables, and any other qualifying expenditure)
• Applying the relevant R&D tax offset rate. The rate is set by legislation and differs for refundable and non-refundable offsets based on your aggregated turnover. The current rates and thresholds must be verified with the ATO for the income year you are claiming.
• Ensuring the total aligns with your registered activities and that you have not exceeded any applicable caps.

The ATO does not allow an unlimited deduction. There are caps on total notional deductions, and special rules apply to expenditure incurred with associates. Additionally, you cannot claim for an asset that was retired or sold before it was used for R&D, unless specific transitional rules apply.

Refundable vs non-refundable offset: For companies with an aggregated turnover below a certain threshold (which was $20 million for recent income years, but always confirm the current figure with the ATO), the R&D offset is refundable. This means if the offset exceeds your tax liability, you may receive a cash refund. For larger companies, the offset is non-refundable and can only reduce tax to nil. The refundable status can significantly influence the benefit of claiming depreciation on assets, especially if it creates a cash-flow uplift. Proposed changes to the refundable-offset turnover threshold have been announced but are not yet law; treat any future reform as proposed and consult your tax agent.

Pro tip: Run the numbers. The notional deduction reduces your taxable income, which can affect other tax positions, such as the small business entity concessions. Discuss with your accountant how an R&D claim interacts with your broader tax profile.

For businesses in technology, manufacturing, or other R&D-intensive sectors, the asset classes eligible for depreciation can vary widely. A software company might claim depreciation on high-performance computing hardware used to train machine learning models (if that activity qualifies as core R&D), while a manufacturer might claim on a custom testing rig. Explore our dedicated pages for GrantsMAX for technology companies and GrantsMAX for manufacturers.

The interaction between R&D incentives and depreciation rules is a live topic in tax policy globally. The Weaver blog discusses recent U.S. federal updates on R&D depreciation, illustrating how quickly the landscape can change. In Australia, too, rules evolve, so treat each income year independently and check the latest ATO and AusIndustry publications.

Step 7: Have your registered tax agent review and lodge the claim

The final, non-negotiable step is professional review. Under the Tax Agent Services Act, only a registered tax agent can charge a fee to prepare and lodge a tax return that includes an R&D claim. Even if you use a tool like GrantsMAX to assemble the supporting data and draft the narrative, the actual lodgement must be performed, or directly supervised, by a registered tax agent. This is the law.

At GrantsMAX, we are not a tax agent. Our platform prepares a complete, evidence-backed application pack: R&D activity descriptions, project narratives, a cost structure pulled from Xero or MYOB, and a supporting-evidence index. We then hand that pack to your registered accountant or tax agent inside a shared workspace. The accountant reviews, refines, and lodges the claim under their professional judgment. You, the business, own the claim and are ultimately responsible for its accuracy.

Why the accountant step is critical for asset depreciation: The depreciation rules we have covered are nuanced, especially around apportionment and the mandatory prime cost method. A competent tax agent will check that:

• The assets are correctly identified and classified
• The effective lives are appropriate
• The apportionment methodology is supportable
• The notional deductions do not conflict with other tax positions (e.g., general depreciation, instant asset write-off, temporary full expensing)
• All ATO requirements are met for the specific income year

Using an accountant who is familiar with the R&D Tax Incentive is strongly recommended. If you do not have one, GrantsMAX works with your existing accountant or bookkeeper, or you can engage a tax agent independently. Our Accountant Review & Lodge Workflow makes the collaboration efficient, with clear tracking from Draft to Review to Lodged.

Warning: Never attempt to lodge an R&D claim that includes asset depreciation without professional review. The ATO and the Tax Practitioners Board actively monitor R&D claims; errors can lead to audits, penalties, and reputational damage. It is not worth the risk.

Key takeaways and next steps

Depreciation of assets used in R&D activities can be a significant component of your R&D Tax Incentive claim, but it demands careful attention to ATO rules and thorough record keeping. To summarise:

• Only assets used for eligible R&D activities may give rise to a notional deduction.
• The ATO requires you to use the prime cost method for calculating the decline in value for R&D purposes.
• You must apportion depreciation between R&D and non-R&D use on a fair and reasonable basis, supported by evidence.
• Contemporaneous documentation is essential; the ATO will expect to see usage logs, asset registers, and project links.
• A registered tax agent must review and lodge your claim; never self-lodge without professional oversight.

If you are ready to explore how GrantsMAX can simplify this process, by connecting to your accounting system, surfacing eligible R&D activities and asset data, and drafting the evidence-backed pack your accountant needs, we invite you to join the GrantsMAX waitlist. We are building a smarter way for Australian businesses to access government funding without the high fees and opacity of legacy consulting, and we would love to have you on board.

Visit GrantsMAX to learn more or see Why GrantsMAX is different. For first-time claimants especially, you may find our page for first-time claimants helpful. And if you are an R&D-active startup, check out GrantsMAX for R&D-active startups.

Disclaimer: This article is general information only, not tax, financial, or legal advice. Eligibility for the R&D Tax Incentive and the correct treatment of asset depreciation depend on your specific circumstances. Always consult a registered tax agent or professional adviser before making a claim. Rules and thresholds change; verify the current ATO and AusIndustry guidance for the relevant income year.