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Guide

The refundable R&D offset for companies under the turnover threshold

A step-by-step guide to the refundable R&D tax offset for Australian companies under the turnover threshold. Who may qualify, what counts as eligible R&D, and

TGThe GrantsMAX Team
13 minutes read

If your company spends real money on research and development in Australia, the refundable R&D tax offset can put cash back into the business even when you are not paying tax. For eligible companies under the turnover threshold, the offset turns a portion of your R&D spend into a refund from the ATO. It is one of the most direct ways the federal government supports innovation.

But rules matter. The refundable offset is only accessible to a specific group of companies, and the conditions around eligibility, expenditure, and record keeping are strict. This guide walks you through exactly who may be eligible, what it takes to access the refundable offset, and how the claim moves from your books to a lodged return, always with a registered tax agent in control. We draw heavily on the ATO, AusIndustry and the Department of Industry, Science and Resources, and OECD comparisons, and we flag proposed changes so you know what may shift down the track.

Prerequisites: who can even consider the refundable offset

Before we step through the process, get clear on the fundamental criteria your company must meet. If any of these are missing, the refundable offset is not an option.

Be an R&D entity. Under the ATO’s rules, this generally means a company incorporated under Australian law, or a foreign company that is an Australian resident for tax purposes or carries on business in Australia through a permanent establishment. Trusts, partnerships, and sole traders cannot claim the R&D tax incentive directly, though a company structure may be used. The company must not be exempt from income tax.

Have an aggregated turnover below $20 million. This is the current threshold that separates refundable from non-refundable offsets. The ATO defines aggregated turnover as your annual turnover plus the turnover of any connected entities or affiliates. A company with aggregated turnover of $20 million or more can still claim the non-refundable R&D tax offset, but that offset can only reduce your tax liability to zero, it does not generate a cash refund. The $20 million threshold is enshrined in the legislation, and at the time of writing, business.gov.au explains it clearly in its overview of the R&D Tax Incentive. (Note: the government has announced a proposal to lift this threshold to $50 million as part of a broader reform framework, but that change is not yet law. Keep an eye on legislative updates; GrantsMAX tracks these shifts for companies that may cross the threshold.)

Conduct eligible R&D activities. AusIndustry, not the ATO, determines what qualifies as core and supporting R&D activities. To access the refundable offset, your company must have conducted at least one core R&D activity during the income year, experimental activities whose outcome cannot be known or determined in advance and that are conducted for the purpose of generating new knowledge. Supporting activities are those directly related to core R&D. Manufacturing process improvements, software development, biotech trials, agtech experiments, and clean energy prototyping often qualify if the uncertainty requirement is met. The ATO’s step-by-step guide underscores that you cannot claim the offset for work that merely adapts existing knowledge or solves routine problems.

Keep proper contemporaneous records. You cannot reconstruct R&D evidence months after the work is done. AusIndustry requires records that demonstrate the hypothesis, the systematic progression of the work, and the results, even if those results are negative. We will cover substantiation later, but if you do not have a record-keeping discipline from day one, the refundable offset is at risk.

If you are a startup with your books in Xero or MYOB, GrantsMAX for first‑time claimants reads your accounting data and starts building the evidence story so your accountant has the raw material to review.

Step 1: Confirm your company’s eligibility for the refundable offset

Check aggregated turnover

Calculate your aggregated turnover for the income year. If it is below $20 million, you may be eligible for the refundable offset. The ATO’s small business entity concessions page explains the aggregation rules in detail; consider whether you have any connected entities (companies you control) or affiliates (entities you have significant influence over). A common trap is a company that owns a 40% stake in another entity, depending on the structure, that may bring the second entity’s turnover into the aggregated figure.

GrantsMAX’s eligibility assessment cross‑references your own accounting data against program rules, so you get a clear read on where aggregated turnover sits before your accountant dives into the claim.

Identify eligible R&D activities

AusIndustry uses the ‘eligible R&D activities’ definition in the Income Tax Assessment Act 1997. To register, you must describe your core activities and any supporting activities. The test for a core activity: it must be an experiment based on systematic investigation, it must generate new knowledge, and you cannot know the outcome in advance. Software companies building a novel algorithm, a food manufacturer developing a shelf‑stable formulation, or an agtech firm testing a sensor system on farm, all of these may qualify if you can point to the scientific or technological uncertainty.

A practical way to think about it: if you already know it will work, it’s probably not eligible R&D. If you need to experiment to find out, it might be. As the OECD’s policy database notes, Australia’s refundable offset premium aims to encourage precisely that uncertainty, particularly for smaller companies that might otherwise skip the investment.

Confirm you are an Australian tax resident or permanent establishment

The company must be either an Australian resident for tax purposes or a foreign resident carrying on business in Australia through a permanent establishment (PE). Nearly all domestically incorporated companies will meet this. If you are a foreign company with a small local team, check whether the PE requirements are met, because the refundable offset is only available for R&D activities conducted in Australia (with some limited overseas exceptions).

Step 2: Register your R&D activities with AusIndustry

This is not optional. Under the law, you must register your R&D activities with AusIndustry (part of the Department of Industry, Science and Resources) within 10 months after the end of your income year. If you miss the deadline, you lose the ability to claim the R&D tax offset for that year, even if the work was genuinely eligible.

Pro tip: Do not wait until you file your tax return. Many companies start the registration process while the R&D work is fresh, often with the help of their tax agent. The registration form requires you to detail the core activities, supporting activities, and the experimental observations. Be specific: vague statements like “developed a new product” will not satisfy AusIndustry’s reviewers. You must describe the hypothesis, the experiments, and what you learned.

GrantsMAX helps by drafting activity narratives from your financial data, project notes, and technical descriptions. The outcome is a structured pack your registered tax agent can refine and then use as the basis for the AusIndustry registration. The AI application pack drafting feature builds the story, but it is the registered agent who reviews and ultimately lodges the registration, ensuring compliance.

Step 3: Capture and substantiate your eligible R&D expenditure

Once you know what activities qualify, you need to correctly calculate the expenditure that can attract the refundable offset. This step often determines the size of the refund, and the ATO is very particular about what you can include.

What counts as notional R&D expenditure?

The legislation lists specific categories:

  • Salary costs for employees directly engaged in R&D activities. You can include a portion of the salary of a software developer, a lab technician, or a process engineer, but only for the time spent on eligible R&D. Timesheets or project allocation records are essential.
  • Contract expenditure on R&D services provided to the company, provided certain conditions are met. If you engage a research institution or an external developer, the payment may be eligible, but the rules about connected entities and the ‘at risk’ test are complex.
  • Consumables and materials used up or transformed during the R&D. For a manufacturer, this could be raw materials run through a pilot line; for a biotech, reagents consumed in trials.
  • Depreciation on assets used exclusively or predominantly for R&D activities. Special rules apply to the decline in value of plant, equipment, and buildings.
  • Overhead costs that can be directly attributed to R&D, such as power for a dedicated lab.

Warning: General business costs, interest, rent, and marketing are not eligible. Simply “doing something new” for the business is not enough, the expenditure must link to the registered activities. The ATO’s calculation steps walk through each category with examples.

Record keeping: your best defence

Substantiation is not a box‑ticking exercise; it is the foundation of a defensible claim. For each cost category, keep contemporaneous records: timesheets signed by employees and managers, project logs, purchase orders, contracts, lab notebooks, test results, and evidence of iterations. The ATO may review R&D claims years after lodgement, and if you lack records showing the direct link between the expenditure and the eligible activities, the offset can be reversed, with interest and penalties.

For companies using cloud accounting systems like Xero, MYOB, or QuickBooks, much of the expenditure data already lives in your ledgers. GrantsMAX for SMBs on cloud accounting reads that data read‑only and matches transactions to R&D activity codes, producing a first‑draft cost schedule for your accountant. But the accountant still needs to verify that every dollar claimed meets the legislative test.

Step 4: Calculate the refundable offset amount

The calculation follows a set formula, but you never do it alone, your registered tax agent will apply the ATO’s published method. Here is the logic:

Current law sets the refundable offset rate for eligible companies with aggregated turnover under $20 million as the company’s corporate tax rate for the year plus a 13.5% premium. For example, a company with a 25% corporate tax rate (small business rate for the 2024 to 25 year) would get a 38.5% offset on eligible R&D expenditure. For larger companies above the small business thresholds but still under $20 million, the corporate tax rate is 30%, giving a 43.5% offset.

You multiply the eligible R&D expenditure by the offset rate to get the offset amount. If that amount exceeds your tax liability, the ATO refunds the difference in cash. That is the refundable element, potentially a significant cash injection for early‑stage, pre‑revenue companies.

This is not a one‑size‑fits‑all figure. The ATO’s R&D tax incentive schedule instructions guide your agent through the precise steps, including adjustments for feedstock expenditure, clawback, and any grant funding that reduces the R&D spend base.

Pro tip for accountants: The interplay between government grants received and the R&D offset can catch clients out. If the company receives a grant that relates to the same R&D project, the eligible expenditure may need to be reduced. This is where GrantsMAX’s grant discovery engine helps a business see the full picture, so the tax agent can then model the net benefit of each funding stream and lodge a claim that holds up.

Step 5: Lodge the R&D tax incentive claim with your tax return

The claim is made in the company tax return, specifically in the Research and Development Tax Incentive Schedule. This is not a separate application; it must accompany the return. Here, sequencing matters:

  1. Register the activities with AusIndustry first.
  2. Complete the R&D schedule with your accountant, showing the expenditure by category and the calculated offset.
  3. Lodge the tax return and the schedule with the ATO.

Only a registered tax agent can lodge the claim on your behalf and charge a fee, unless you lodge it yourself, which rarely happens for an R&D claim due to the technical complexity. GrantsMAX never lodges. What the platform does is prepare a complete, evidence‑backed application pack, activity narratives, cost structure pulled from your Xero data, and a supporting-evidence index, and then hands that pack to your registered agent in a shared workspace. The accountant review and lodge workflow lets the agent review, refine, and lodge with full control, while the business stays the owner of the claim.

After lodgement, the ATO may issue a notice of assessment that includes the refundable offset amount. If the offset exceeds the company’s tax payable, the excess is refunded. Turnaround times vary, but refunds typically arrive within the standard ATO processing periods, provided the claim is complete and consistent with the AusIndustry registration.

Step 6: Prepare for review and maintain ongoing compliance

R&D claims are regularly reviewed by the ATO and AusIndustry. A refundable offset claim does not mean “audit‑proof,” but it does mean you should be ready to explain each claimed dollar. Your accountant will want to confirm that:

  • All registered activities are correctly described and align with what you actually did.
  • Timesheets and cost allocations are contemporaneous and reconciled to payroll and accounting records.
  • There is a clear nexus between each expenditure item and the R&D activity.
  • Any changes in project scope or failure of experiments are documented, negative results are still R&D if the systematic investigation proves something could not work.

Pro tip from industry advice: Bridgepoint Group’s practical guidance suggests that you treat R&D record keeping like a mini‑month‑end close: capture what you did, how many hours it took, what materials you used, and what you learned. This habit, repeated monthly, turns a stressful year‑end scramble into a straightforward data assembly.

What about the proposed reform to the turnover threshold?

In the 2025 to 26 Federal Budget, the government announced an intention to lift the refundable offset turnover threshold from $20 million to $50 million, effective from income years starting on or after 1 July 2025. As an announced but unenacted measure, this is not yet law. If passed, it would mean many more scaling companies could access the cash‑refund version of the offset. Keep watching official AusIndustry and ATO updates; GrantsMAX tracks these legislative changes so that businesses approaching the threshold know exactly when their status may shift. The GrantsMAX for growing companies page explains what this change signals for businesses that expect to cross $20 million soon.

A word on accountants and responsible claiming

Because the R&D Tax Incentive is a self‑assessment tax offset, the responsibility for getting it right rests with the company and ultimately with the registered tax agent who signs the return. The Tax Practitioners Board (TPB) expects agents to apply proper professional standards. That is why the GrantsMAX workflow keeps the agent at the centre: the platform provides the structured data and draft narratives, but the agent decides what to lodge.

This division matters. It means the company is not relying on a software tool to “guarantee” a refund, and the agent is not starting from a blank page. The accountant review workflow is built so firms can manage multiple client claims efficiently while staying compliant. For accounting and bookkeeping firms looking to offer R&D services without building an in‑house consultancy, GrantsMAX for accounting and bookkeeping firms provides a white‑label way to discover, prepare, and review packs across the client base.

International context: how Australia’s refundable offset stacks up

Australia’s refundable R&D offset is relatively generous by global standards. The OECD’s policy monitor notes that the combination of a high premium and a cash refund for small entities makes the Australian incentive one of the most direct funding levers for R&D‑conducting small businesses. In the United States, for example, the equivalent incentive, the Qualified Small Business Payroll Tax Credit, allows start‑ups to offset payroll taxes, but it is capped and not available as a direct cash refund beyond the payroll tax liability. The Australian offset, by contrast, can deliver a cash refund even to companies with no tax payable, which is why it is so valuable for pre‑revenue deep‑tech firms. Analysis by Bloomberg Tax underscores that refundable credits like Australia’s are particularly powerful for countries seeking to attract and retain mobile R&D investment.

That said, the eligibility bar in Australia remains high. The ATO and AusIndustry enforce the “eligible R&D” definition rigorously. Recent guidance from HLB Mann Judd on the accounting treatment highlights the need for precise allocation of costs and documentation of the experimental nature of the work. The Chamber of Commerce Australia’s refundable offset guide likewise stresses that the cash refund is not a handout but a reward for undertaking genuine innovation with uncertain outcomes.

Summary and key takeaways

  • The refundable R&D tax offset is available to companies with an aggregated turnover below $20 million that conduct eligible R&D activities and register with AusIndustry. The offset rate is the corporate tax rate plus a 13.5% premium (verify the current year’s rates with your tax agent).
  • You must register your R&D activities with AusIndustry within 10 months of year‑end, and lodge the R&D schedule with your tax return.
  • Record keeping is the linchpin. Contemporaneous timesheets, project logs, and cost allocations are not optional, they are the minimum the ATO expects.
  • A registered tax agent must review, refine, and lodge the claim. GrantsMAX prepares the pack but never lodges. The business owns the claim, and the agent signs it.
  • Proposed reforms may lift the turnover threshold to $50 million, but this is not yet law. Do not rely on it until enacted.
  • The refundable offset can provide a significant cash refund even if your company pays no tax, making it one of the most powerful incentives for R&D‑intensive startups.

If your books already live in Xero, MYOB, or QuickBooks and you think some of your work might be eligible R&D, the next step is simple: get a professional opinion. GrantsMAX for founders and CFOs connects to your accounting data read‑only, maps what you have been doing to likely government funding, and hands your accountant a draft pack. From there, your accountant reviews and lodges. The platform is designed for the reality of Australian business, no jargon, no inflated fees, and no promises about outcomes.

Want to be among the first to use it? Join the GrantsMAX waitlist at grantsmax.com and get early access to a tool built specifically for the way Australian companies claim the R&D Tax Incentive.