R&D Tax Incentive glossary: terms every founder should know

Introduction

If you run a company that invests in research and development, the R&D Tax Incentive can be one of the most valuable government measures available to you. But the language that comes with it, core activity, notional deduction, at-risk, feedstock, can feel like a foreign tongue. Without a clear understanding of these terms, conversations with your accountant can become confusing, and the claim process may seem more intimidating than it needs to be.

This glossary is designed for Australian founders, CFOs, and business owners who want to speak the language of the R&D Tax Incentive fluently. It is not tax, financial, or legal advice. The rules are complex and change over time; you should always confirm your position with a registered tax agent. We have drawn on official definitions published by the ATO and AusIndustry (part of the Department of Industry, Science and Resources) to make the concepts as accurate as possible. For a broader look at the incentive, see our What is the R&D Tax Incentive? guide.

At GrantsMAX, we help businesses discover the grants and R&D tax incentives they may be eligible for, and we prepare a complete, evidence-backed application from your own accounting data, but a registered tax agent or accountant always reviews and lodges the claim. You own the claim. Read about how GrantsMAX works.

Let’s break down the terms that matter most, step by step.

Prerequisites: what to have before you start

Before you dive into the definitions, make sure you have a couple of things in place. These are not formal requirements, but they will help you get the most out of this glossary.

Link your accounting data (read-only)

The R&D Tax Incentive is evidence-intensive. Describing your activities is only half the battle; you also need to identify the related expenditure in your books. GrantsMAX connects to your Xero, MYOB, QuickBooks, Microsoft 365, or Google Workspace, all read-only, through the GrantsMAX browser connector. That lets you pull the raw numbers into the right cost categories so that nothing is missed when the time comes to quantify your claim. If you haven’t already, having a complete, reconciled set of accounts will make every term in this glossary practical, not just theoretical.

Understand the role of a registered tax agent

The R&D Tax Incentive is self-assessed: you work out whether you are eligible, you keep records, and you lodge the schedule with your tax return. However, the ATO strongly recommends using a registered tax agent. In our model, GrantsMAX prepares the evidence-backed pack, but a registered tax agent reviews and lodges. That division of responsibility is important: the Terms of Use explain that GrantsMAX does not lodge, guarantee outcomes, or replace professional judgement. Knowing who does what will help you use the terms in this glossary in the right context.

With those basics in place, let’s move through the key terms.

Step 1: Core vs supporting R&D activities

Every R&D Tax Incentive claim begins with classifying what you actually do. Two phrases you will hear constantly are core R&D activities and supporting R&D activities.

Defining core activities

A core R&D activity is a systematic, investigative, or experimental activity that is conducted for the purpose of generating new knowledge. It must meet two requirements:

• The outcome cannot be known or determined in advance on the basis of current knowledge, information, or experience (the outcome must be uncertain).
• It must proceed from hypothesis to experiment, observation, and evaluation, following a systematic progression of work.

In plain English: if you can pick up a textbook and predict exactly whether what you are building will work, it is probably not a core activity. If, however, you are genuinely trying to resolve a scientific or technological uncertainty, for example, developing a new algorithm whose behaviour you cannot fully predict without testing, you may have a core activity.

This definition aligns with the guidance published by AusIndustry and is discussed in detail by the ATO on its R&D Tax Incentive page. Other jurisdictions use similar tests; the United States Internal Revenue Service, for example, lays out a four-part test for qualified research that includes elimination of uncertainty and a process of experimentation.

Defining supporting activities

Supporting activities are those that are directly, and predominantly, undertaken for the purpose of supporting one or more core R&D activities. They can include things like building a prototype, setting up test equipment, or conducting data collection that is essential to the experiment, but not activities such as market research, quality control, or routine software testing.

To be a supporting activity, the work must be directly related to a core activity and the majority of its time or effort must serve that purpose. A practitioner glossary from Swanson Reed expands on the nuances that border these definitions, but the critical point for an Australian claim is that both types of activities must be registered with AusIndustry before the claim can be lodged.

Pro tip: document the distinction

When you record your R&D activities, label each piece of work as core or supporting. Note the hypothesis you were testing and how the outcome was uncertain at the time. This contemporaneous evidence becomes the backbone of an evidence-backed pack, which is exactly the sort of material GrantsMAX helps you organise from your operations data. (We discuss substantiation further under Step 6.)

Step 2: The notional deduction and how the offset is calculated

Once you have identified your R&D activities, you need to work out what the incentive is worth. The mechanics revolve around a notional deduction.

What is a notional deduction?

A notional deduction is a calculated amount that represents the expenditure you incurred on eligible R&D activities, adjusted for things like feedstock (see Step 4) and grants. It is called “notional” because you do not actually claim this amount as a deduction on your tax return. Instead, the R&D tax offset is computed by applying a legislated percentage to the notional deduction.

For a detailed breakdown, always refer to the ATO’s current formula. The exact rates are set in law and are subject to change. For example, the rate for entities with an aggregated turnover below a certain threshold may be higher than for larger entities. The ATO’s official R&D Tax Incentive page is the primary source for the numbers that apply in the current income year.

How the offset amount is determined

The offset can be refundable or non-refundable depending on your aggregated turnover and corporate tax status. Generally, if your aggregated turnover is less than $20 million and you are not controlled by exempt entities, the offset may be refundable (meaning you can receive a cash refund even if you are in a tax loss position). For larger entities, the offset is non-refundable and may be carried forward.

Important: The Australian Government has announced a proposed change that would lift the refundable offset turnover threshold from $20 million to $50 million. As of today, that change has not been enacted. Always verify the current law with your registered tax agent.

The concept of a notional deduction is unique to the Australian system. International parallels exist, however: the UK’s SME R&D relief also works via an enhanced deduction, as outlined by HMRC.

Warning: proposed changes to the refundable offset

Because tax law can shift, never assume that what you read online is current. Even official government announcements are not the final law until they pass Parliament. Always check the status of any reform, including the proposed threshold change, with your accountant. The GrantsMAX Annual Refresh feature is designed to incorporate the latest rules each year, but your registered tax agent makes the final lodgement.

Step 3: Who bears the at-risk?

The at-risk rule is one of the most important concepts for companies that enter into agreements with other parties (such as contractors or joint ventures) to conduct R&D.

The at-risk rule explained

Broadly, an R&D entity can only include expenditure in its notional deduction if it bears the financial risk of the R&D activities. If you are paying a contractor to perform R&D for your benefit, but the contractor is carrying the risk of loss, the expenditure may not be eligible for you. The rule ensures that the entity claiming the incentive is the one that genuinely stands to lose if the project fails.

There are exceptions for related-party transactions and for expenditure on “R&D activities conducted overseas” (subject to strict conditions). The ATO’s guidance provides worked examples. If you are in a co-development arrangement, take extra care: the at-risk test can affect which entity registers the activity. Your accountant will audit this closely, which is another reason why GrantsMAX does not lodge, we hand your registered tax agent a complete pack so they can apply their professional judgement.

Step 4: Feedstock rules and the clawback

If your R&D activities generate a product that you subsequently sell (or use), you may face a feedstock adjustment.

What is feedstock expenditure?

Feedstock expenditure is the cost of tangible materials or goods that are transformed or processed during R&D activities and that result in a marketable product. A classic example is a food manufacturer that develops a new process and, in doing so, creates product that is then sold to customers.

Under the rules, you cannot receive the R&D Tax Incentive on the full cost of those materials twice, first through the notional deduction and then again through the ordinary cost of goods sold. A feedstock adjustment reduces the notional deduction by the value of the marketable product, effectively preventing a double benefit.

How the feedstock adjustment works

The adjustment is calculated as the lesser of:

• The feedstock expenditure, or
• The net market value of the product produced.

You need to be able to track the quantity and value of the output. Good record-keeping, from batch records to sales invoices, is essential. The ATO expects contemporaneous documentation, and without it, a claim may be at risk in a review.

Step 5: Other essential terms

Here are several more terms that crop up repeatedly, each with important implications for eligibility and compliance.

Eligible R&D entity

You must be an R&D entity, which generally means a corporation that is either an Australian resident, or a foreign resident that carries on business through a permanent establishment in Australia and is registered under the Corporations Act 2001, among other requirements. Most Australian companies conducting R&D will qualify, but check with your accountant.

Aggregated turnover and its impact

Your aggregated turnover, the total ordinary income of your entity and any connected or affiliated entities, determines whether your offset is refundable and at what rate. The ATO publishes annual guidance on how to calculate this. Because a miscalculation can change the offset you receive, this is one of the many areas where the professional review of a registered tax agent is critical.

Refundable vs non-refundable offset

As mentioned, if your aggregated turnover is below the current legislated threshold (and you meet the other criteria), you may be entitled to a refundable offset, which means the ATO will pay you the excess over your tax liability. If the offset is non-refundable, any unused amount may be carried forward to future years. The distinction matters enormously for cashflow planning, so discuss it early with your accountant.

Clinical trials as R&D

Clinical trials can be core R&D activities if they involve systematic, scientific investigation to resolve a specific scientific or technological uncertainty, for example, testing a new medical device to determine whether it achieves a particular safety or efficacy outcome. The OECD’s overview of R&D tax incentives notes that many countries treat clinical development as eligible R&D, provided the work meets the definitions. In Australia, each trial must satisfy the core-activity test.

Software development and the technical risk test

Software development is a frequent source of claims. The key is whether the work involves a genuine technological uncertainty. If you are building a new machine-learning model, the uncertainty might be whether the model can achieve a particular level of accuracy given the data constraints. If you are simply configuring off-the-shelf software, it is unlikely to qualify. Our guide for technology companies details how the narrative is built.

Overseas activities and the overseas finding requirement

R&D conducted outside Australia may only be eligible if a specific overseas finding has been obtained from AusIndustry, confirming that the activity cannot be conducted in Australia for reasons such as specialist equipment, a unique population, or safety considerations. Do not assume overseas work is covered without this finding. More detail is on the business.gov.au grants and assistance page.

Step 6: Using the glossary when preparing your claim

Knowing the definitions is one thing; applying them to a real claim is another. Here is how a typical claim preparation might look when you use the terms in this glossary alongside the right tools and professional support.

A practical example: a SaaS startup

Imagine a startup building an AI-based fraud detection tool. During the year, the team:

• Developed a novel anomaly-detection algorithm whose performance was uncertain (core activity).
• Wrote unit tests and built a staging environment to validate the algorithm (supporting activity).
• Purchased cloud computing time exclusively for the experiments.

The first step is to grab the accounting data. With the GrantsMAX browser connector, the team links their Xero file, read-only. The system then identifies payroll, contractor, and cloud costs that map to the period of the R&D project.

Next, the team drafts activity descriptions. They use the glossary: they label the algorithm work as a core activity because the outcome could not be predetermined; they label the test environment build as a supporting activity because it was directly undertaken to enable the core work; they note that the cloud costs are a direct R&D expenditure, not a feedstock situation. All of this gets compiled into an evidence-backed application pack. The draft includes a calculation of the notional deduction based on the raw costs, but the final offset rate will be applied by the registered tax agent once they have reviewed the aggregated turnover and all eligibility factors.

The team does not lodge. Instead, they pass the pack to their registered tax agent, who checks compliance, adds any additional commentary, signs off, and submits the R&D schedule. The startup retains full ownership of the claim.

This process aligns with the privacy and security architecture described in our Security page: the data is read-only, encrypted, and never shared beyond the accountant channel unless the business authorises it.

Pro tips and common pitfalls

• Misclassifying routine work. Upgrading to a new database version is usually not R&D, even if it is difficult. Distinguish between operational challenges and genuine technical uncertainty.
• Forgetting to register. You must register your R&D activities with AusIndustry within 10 months of the end of the income year. Registration is separate from lodging the tax return.
• Poor documentation. Without contemporaneous records, you cannot reconstruct a credible claim later. The ATO is clear: “You should keep records at the time you carry out the activities.” GrantsMAX can help you organise the data you already have, but you need to keep the underlying source material.
• Not coordinating with your accountant early. The R&D Tax Incentive interacts with your tax return. Your accountant should be involved from the beginning, not as an afterthought.

Key takeaways

1. The R&D Tax Incentive has a vocabulary built around several core concepts: core vs supporting activities, notional deduction, at-risk, feedstock, and more. Understanding them helps you have productive conversations with your accountant.
2. Always verify the current rates, thresholds, and legislative status with the ATO or your registered tax agent. The programme can change, and only your advisor knows the law as it applies to your specific income year.
3. The business owns the claim, not the AI tool or the accountant. Tools like GrantsMAX prepare the evidence pack, but a human tax professional must review and lodge.
4. Good record-keeping and contemporaneous documentation are the best defence in an ATO review.

Conclusion and next steps

The R&D Tax Incentive can meaningfully support businesses that push the frontier of science and technology, if you take the time to understand the rules and build a robust claim. This glossary gives you the foundational language, but every business is different. When you are ready to move from definitions to action, consider using a service that bridges your data and your accountant.

GrantsMAX connects to your Xero, MYOB, QuickBooks, or other systems (read-only), continuously discovers the grants and R&D tax incentives you may be eligible for, and prepares an evidence-backed pack for your registered tax agent to review and lodge. There is no magic button that guarantees an outcome, but a well-prepared pack makes the whole exercise faster and more transparent.

If you would like to be among the first to use GrantsMAX, join the waitlist today. For more resources, visit our Blog or reach out through our Contact page.