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Guide

Refundable vs non-refundable R&D tax offset: which applies to your business

Understand the two R&D tax offset types and how your aggregate turnover determines whether your claim is refundable or non-refundable. Step-by-step guide for

TGThe GrantsMAX Team
10 minutes read

Prerequisites: what you will need before you start

Before you can work out which R&D tax offset type applies to your business, gather the following:

  • Your latest company tax return and notice of assessment. These show your taxable income and tax rate, which feed into the offset calculation.
  • A calculation of your aggregated turnover for the income year. This figure determines whether the refundable or non-refundable offset is available to you. If your corporate group includes other entities, you will need their turnover figures too.
  • A list of your R&D activities and the associated expenditure. You should be able to describe each activity, its purpose, the technical uncertainty it addressed, and the people and resources involved, even if it is just a rough outline.
  • Read-only access to your accounting software (Xero, MYOB, QuickBooks) or productivity suite (Microsoft 365, Google Workspace). GrantsMAX can connect to these data sources and surface eligible costs automatically, then build an evidence trail.
  • Your registered tax agent's details, or the name of an accountant you intend to work with. The R&D Tax Incentive claim must be lodged by a registered tax agent (or you can self-lodge, but professional review is strongly recommended for compliance).

If you are a founder juggling everything, a small team without a dedicated finance function, or an accountant looking to streamline claims for multiple clients, having this foundation ready will save time and help you avoid errors later. GrantsMAX for small businesses works from your existing accounting data so you do not have to start from scratch.

Step 1: Identify your R&D activities and map them to core and supporting eligibility

The R&D Tax Incentive is activity-based. You cannot simply claim a flat percentage of your R&D department spend; each activity must meet the definition of a “core” R&D activity or a “supporting” R&D activity under the Income Tax Assessment Act 1997.

What counts as an R&D activity?

A core R&D activity is an experimental activity whose outcome cannot be known or determined in advance on the basis of current knowledge, and that is conducted for the purpose of generating new knowledge. In practice, this includes systematic experimentation, prototyping, testing, and analysis in fields such as software development, manufacturing process improvement, biotechnology, agtech, clean energy, and construction innovation.

A supporting R&D activity is an activity directly related to a core R&D activity, but does not itself meet the core test. Examples include cleaning and maintaining equipment used in experiments, or administrative tasks directly linked to the R&D project.

Pro tip: Many businesses overlook eligible activities because they see them as “just part of the job.” If you are solving a technical problem with no known solution, you may be conducting R&D. GrantsMAX for technology companies drafts activity narratives from your connected data, turning engineering work into a structured claim. For manufacturers, GrantsMAX for manufacturers can help capture process improvements and automation trials.

Common misconceptions

One persistent myth is that R&D must succeed to be claimable. The Australian Taxation Office (ATO) and AusIndustry do not require a successful outcome; the work must have been systematic and uncertain, regardless of the result. Another myth is that only lab-coat science qualifies. Software engineering, agtech field trials, and even food product development can meet the criteria if there is a genuine technical unknown. For a deeper dive, read 18 Common Misconceptions About R&D Tax Incentives from Pattens.

Step 2: Confirm your company meets the R&D entity eligibility

Not every business is eligible to register for the R&D Tax Incentive. The entity must be an “R&D entity” as defined by the legislation. In most cases, that will be a company incorporated under Australian law that is a resident for tax purposes, or a foreign company that is a resident of a country with which Australia has a double tax agreement and that carries on business through a permanent establishment in Australia.

Key conditions include:

  • The R&D activities must be conducted for the entity (i.e., the company bears the financial risk).
  • The entity must be able to control the results of the R&D, broadly, it must have the right to exploit the intellectual property commercially.
  • The R&D activities must be conducted in Australia (or, for some activities, in an external territory). Overseas activities are generally ineligible, with limited exceptions for activities that cannot be performed in Australia and that are declared as an Overseas Finding.

The Overview of the R&D Tax Incentive on business.gov.au sets out these requirements in plain terms. For a more technical treatment, you can also review the ATO's detailed guidance on eligibility. Similarly, Grant Thornton Australia's innovation incentives page offers a high-level summary.

If you are a startup that has never claimed before, checking entity eligibility is the first checkpoint. GrantsMAX for first-time claimants walks you through the steps by reading your accounting data and flagging potential gaps before you engage your accountant.

Step 3: Work out your aggregate turnover correctly

Your aggregated turnover is the number that decides whether the refundable or non-refundable R&D tax offset applies. The ATO sets the turnover threshold, and for the 2023-24 income year, an aggregated turnover of less than $20 million makes your company eligible for the refundable offset; $20 million and above means you receive the non-refundable offset. Always verify the current threshold for your income year on the ATO website, as it can be indexed or changed.

Calculating aggregated turnover is not simply your company's top-line revenue. It includes your annual turnover plus the annual turnover of any entity that is “connected” or “affiliated” with your company. The grouping rules are designed to prevent large groups from artificially splitting businesses to fall under the threshold.

Key points:

  • Connected entities include entities you control (or that control you) and entities under common control.
  • Affiliated entities capture entities that effectively control your company, even if not directly connected.
  • Turnover includes all ordinary income derived in the ordinary course of business, not just from Australian sources.

If you are part of a group, you must aggregate the turnover of all relevant entities for the same income year. This can be a complex assessment, and getting it wrong can lead to an incorrect offset claim. GrantsMAX's Eligibility Assessment & Risk Flags module helps surface these grouping issues from your data, so you can address them before your accountant lodges.

The OECD's INNOTAX portal provides an international overview of Australia's R&D tax incentive design, noting how the refundable offset is targeted at smaller companies.

Step 4: Check the refundability threshold for the current income year

Once you have your aggregated turnover, compare it with the threshold published by the ATO.

  • If your aggregated turnover is less than the threshold (currently $20 million for 2023-24), you may be eligible for the refundable R&D tax offset. This means if the offset exceeds your tax liability, the ATO will refund the excess as cash. This can be a powerful source of non-dilutive funding for cash-hungry startups.
  • If your aggregated turnover is $20 million or more, you receive the non-refundable R&D tax offset. This offset can only reduce your income tax payable to zero; any unused portion can be carried forward to future years, but you cannot get a cash refund unless your turnover later falls below the threshold.

Warning: The threshold is not static. The Australian Government has announced a proposal to increase the refundable-offset aggregate turnover threshold from $20 million to $50 million, starting for income years beginning on or after 1 July 2024 (often called the 2026 reform). As of writing, this is a proposal only, not enacted. GrantsMAX for growing companies explains the potential impact: if enacted, many mid-sized businesses could receive a cash refund for their R&D offset instead of carrying forward non-refundable credits. Always confirm the current rules with your accountant or by checking the ATO website.

Many businesses assume they will get a refund because they are “small,” but aggregated turnover can be higher than expected once connected entities are included. GrantsMAX for founders and CFOs helps you see what you may be leaving on the table by not claiming, and then models the likely offset type based on your turnover data.

Step 5: Understand the offset rates and how they are applied

The R&D tax offset is a percentage of your total notional R&D deductions for the income year. The percentage depends on your corporate tax rate and which offset type applies.

The ATO publishes the official rates annually. For the 2023-24 income year (verify on the ATO's R&D tax incentive rates page):

  • Refundable offset: your company tax rate + 18.5 percentage points.
  • Non-refundable offset: your company tax rate + 8.5 percentage points.

Your company tax rate depends on your status: for base rate entities (aggregated turnover under $50 million and 80% or less of assessable income is passive), the rate is 25% for 2023-24; for others, the rate is 30%. So a base rate entity with refundable offset would receive 25% + 18.5% = 43.5% of its R&D expenditure as an offset.

Example: If your company is a base rate entity, your refundable R&D tax offset is 43.5 cents for every dollar of eligible R&D expenditure. If your total R&D notional deductions are $500,000, your offset is $217,500. If your tax liability is only $100,000, the ATO will refund the remaining $117,500.

Non-refundable offsets work differently. You still calculate the offset at your tax rate plus 8.5 percentage points, but you can only use it to offset your tax payable. Any surplus is carried forward to future income years (subject to the rules of non-refundable carry-forward tax offsets, including the requirement to have enough tax payable in later years). Pitcher Partners' guide on getting the accounting right and BDO's accounting note offer deep dives into how these offsets affect your financial statements.

Pro tip: Do not confuse the R&D tax offset with a grant. The offset reduces your tax bill or results in a cash refund after you have lodged your tax return. You still need to spend the money first and have the evidence to support the claim. HLB Mann Judd's accounting treatment note explains the income tax accounting for both offset types.

Step 6: Build a strong evidence base before your accountant reviews

The ATO and AusIndustry require substantiation: contemporaneous records that prove the R&D activities occurred, the expenditure was on eligible items, and the costs are reasonable. Without a clear evidence trail, a claim can be reduced or denied under audit.

Records you should keep:

  • Timesheets or project logs showing who worked on which activity and for how long.
  • Technical notes, test results, prototypes, and screenshots that demonstrate the experimental nature.
  • Invoices and receipts for materials, contractor costs, and consumables.
  • Minutes of project meetings or design reviews.

GrantsMAX's AI Application Pack Drafting turns your business data into a complete, evidence-backed application pack, R&D activity and project narratives, a cost structure pulled from Xero, and a supporting-evidence index, in hours, not weeks. The system ties each activity and cost line to its source, building an audit-ready evidence trail your accountant can stand behind.

Warning: A common pitfall is reconstructing evidence months after the fact. Contemporaneous records are the gold standard; retrospective explanations carry less weight. Start capturing evidence as the work happens.

GrantsMAX for R&D-active startups reads your Xero data and drafts activity narratives that connect your engineering work to the regulatory language used by AusIndustry and the ATO.

Step 7: Engage a registered tax agent for review and lodgement

The R&D Tax Incentive claim is part of your company's tax return. While you can self-lodge, the complexity of the legislation and the need for accurate activity descriptions make professional review highly advisable. A registered tax agent or accountant can assess whether your activities meet the legal definition, verify the eligibility of costs, and ensure the claim is correctly registered with AusIndustry before lodgement.

GrantsMAX was built to work hand-in-hand with accountants. We prepare the evidence-backed pack, then hand it to your registered accountant in a shared review and lodge workspace. The accountant reviews, refines, and lodges; the business owns the claim. This division of responsibility aligns with the Tax Practitioners Board requirements: the AI assists with preparation, but the licensed professional is in control at every step. We never lodge claims, guarantee outcomes, or promise audit-proofing.

If you are a bookkeeper or administrator who is close to the client data, GrantsMAX for bookkeepers lets you surface potential claims and then pass the prepared pack to the registered tax agent to review and lodge.

Step 8: Plan ahead: annual refresh and 2026 reform

The R&D Tax Incentive is an annual claim. Each income year, you must register your activities with AusIndustry, gather evidence, and include the claim in your tax return. GrantsMAX's annual refresh feature pulls your latest accounting data and updates the application pack accordingly, so you can keep claiming without massive rework.

Also, keep an eye on the proposed increase of the refundable-offset aggregate turnover threshold from $20 million to $50 million. If enacted, this could dramatically widen the pool of companies eligible for cash refunds. The ATO and Department of Industry, Science and Resources will publish final details when the law is passed. In the meantime, building good R&D substantiation habits now will put you in a strong position to take advantage of any future expansions.

Summary: key takeaways

  1. The R&D Tax Incentive offers two offset types: refundable for companies with aggregated turnover below the ATO's threshold (currently $20 million), and non-refundable for those at or above the threshold.
  2. Your aggregated turnover must consider connected and affiliated entities, a simple revenue figure from your P&L may not be correct.
  3. Offset rates are set by the ATO and depend on your corporate tax rate. Refundable offset: tax rate + 18.5 percentage points. Non-refundable offset: tax rate + 8.5 percentage points. Always verify current rates for your income year.
  4. Substantiation is critical. Contemporaneous records protect your claim. An AI tool like GrantsMAX can build an audit-ready trail from your existing data.
  5. A registered tax agent must review and lodge the claim; the business owns it. Never rely on a tool that promises to “file” or “maximise” your claim.
  6. Watch for the proposed $50 million threshold increase: if passed, some mid-sized businesses could switch to refundable offsets.

This guide is general information only and does not constitute tax, financial, or legal advice. Eligible activities, rates, and thresholds change. Verify the current rules with a registered tax agent and the ATO before making any claim.

Ready to see what your business may be eligible for? Join the GrantsMAX waitlist today and be among the first to get an evidence-backed R&D pack for your accountant to review and lodge.