The R&D Tax Incentive for medical device companies

Medical device companies often walk a tightrope between innovation and regulation. The work that makes a device safer, smaller, smarter, or more effective frequently looks like textbook R&D, and that work may be eligible for the Australian Government's Research and Development Tax Incentive. This article steps through what the incentive is, how medical device activities may fit, the evidence you need to keep, and the role your registered tax agent plays in lodging a claim.

We cover general information only, not tax, financial, or legal advice. Confirm any detail with a registered tax agent for your current income year, because rules and rates change. Head to the GrantsMAX blog for more plain-English guidance, or book a walkthrough to see how GrantsMAX prepares a pack from your own data.

Prerequisites

Before you begin working through the steps below, make sure you have:

• An Australian company that is a taxable entity (a standalone R&D entity structure can also be used, but talk to your tax agent about that).
• A clear understanding that innovation alone is not enough: your work must meet the legislative definitions under the Income Tax Assessment Act 1997 and the Industry Research and Development Act 1986. The Department of Industry, Science and Resources and the ATO jointly administer the program, and Industry Innovation and Science Australia (IISA) provides advice. You can read the overarching what is the R&D Tax Incentive guide before diving into the medical-device specifics.
• A good grasp of your product development stages: concept, technical feasibility, design & development, prototyping, testing and validation, and regulatory work. R&D sits in the systematic, experimental parts of that lifecycle, not in routine engineering.
• An appreciation that the Therapeutic Goods Administration (TGA) and other regulators set the safety and performance bar, and meeting it alone is seldom R&D. The R&D is the uncertainty you resolve to get there.

Step 1: Understand the R&D Tax Incentive basics

The R&D Tax Incentive is the Australian Government's main program to encourage companies to invest in research and development. It provides a tax offset, meaning it reduces the tax you pay or, for eligible smaller companies, may provide a cash refund.

Two offset rates exist:

• A refundable offset for eligible entities with aggregated turnover of less than $20 million (as per current rules, attributed to the ATO). This can generate a cash refund if the offset exceeds your tax payable.
• A non-refundable offset for entities with aggregated turnover of $20 million or more, which reduces tax payable but does not give a refund.

Important: The Government has announced a proposal to raise the refundable turnover threshold to $50 million, but this is not yet enacted. Always verify the current thresholds on the ATO website (ato.gov.au) and the Department of Industry, Science and Resources site (business.gov.au) for your income year.

For a medical device business, the offset can be material. Eligible R&D expenditure may include employee salaries (for time spent on R&D), consumables, contract R&D services, and an allocation of overheads. The offset is calculated on this expenditure, and it reduces your income tax liability or yields a refund.

The ATO's guidance on Research and development tax incentive (ato.gov.au) and the AusIndustry website are the primary sources. Bookmark them.

Pro tip: Do not treat the incentive as a grant. You claim it in your tax return after your accountant reviews and lodges; it is not a cash payment before the work is done. The business owns the claim and the risk, not the adviser.

Step 2: Determine whether your medical device activities may be eligible

Eligibility hinges on two questions: (1) are you conducting core R&D activities, and (2) are those activities supported by supporting R&D activities? Both must be undertaken for the purpose of generating new knowledge.

The medical device R&D landscape

Medical device innovation often follows a pathway: concept, technical feasibility, design inputs, design and development, verification and validation (including bench testing, animal studies, biocompatibility, clinical evaluation), and transfer to manufacture. The regulatory overlay comes from the TGA (and possibly overseas regulators like the FDA or notified bodies for CE marking). The TGA's essential principles and conformity assessment processes require evidence of safety and performance, but the work to generate that evidence can be R&D if it involves a systematic, experimental attempt to resolve technical uncertainty.

At the concept and feasibility stages, you are likely experimenting with new materials, algorithms, or biological interactions. That clearly may be eligible. Later-stage verification testing to a known standard is generally not core R&D, but the development of new test methods or novel analytical techniques may be. Similarly, solving a manufacturing problem that requires experimentation to achieve consistent quality could be eligible.

The U.S. experience may provide a useful comparison: under Section 41 of the Internal Revenue Code, the IRS (irs.gov) recognises activities such as developing new or improved medical devices, testing prototypes, and creating new manufacturing processes. Australia's framework is similar in spirit but different in detail, and you should always anchor your analysis in the Australian legislation.

Regulatory context and R&D

A medical device's regulatory clearance (TGA ARTG inclusion, FDA 510(k), EU MDR) is not R&D by itself. But the experimental work you did to demonstrate safety and efficacy, such as novel in-vitro testing or custom software validation under IEC 62304, may qualify if it resolved genuine unknowns.

The FDA guidance on Medical Device Manufacturing and Quality Systems outlines processes that, when approached innovatively, often involve experimentation. For Australian companies seeking FDA clearance, similar activities could align with core R&D. Focus on the systematic and uncertainty-resolving nature of the work.

Warning: Routine design, reverse engineering, or applying known standards to a new device are not eligible. The ATO and AusIndustry examine the experimental character of the activity. If you already knew the outcome, it is unlikely to count.

Step 3: Identify your core R&D activities

Core R&D activities are experimental activities whose outcome cannot be determined in advance on the basis of current knowledge, information, or experience, but can only be determined by applying a systematic progression of work. The activity must be conducted for the purpose of generating new knowledge.

For a medical device company, typical core activities may include:

• Developing a new polymer coating intended to reduce thrombogenicity, where the interaction with blood cannot be predicted from existing literature and requires bench and animal testing.
• Designing and validating a machine-learning algorithm to classify arrhythmias from ECG data, where the algorithm architecture and training methodology involve technical uncertainty.
• Creating a novel minimally invasive delivery system for a stent, where the mechanics of deployment in tortuous anatomy cannot be modelled with certainty.
• Formulating a bioresorbable scaffold and testing its degradation profile under physiological conditions, when you must experimentally determine the rate of strength loss.
• Solving a sterilization challenge for a combination device that cannot withstand standard gamma irradiation without degrading the drug component, requiring experimentation with alternative methods like low-temperature oxidative processes.

In each case, write a clear hypothesis, describe the experiments you performed, the results, and the technical conclusions. That narrative becomes the backbone of your claim.

Industry bodies such as the Medical Technology Association of Australia (MTAA) occasionally publish guidance, and external resources like Alliant Group's analysis illustrate how manufacturing and quality processes can drive R&D claims. While that analysis is U.S.-focused, the principles of systematically resolving technical uncertainty are universally recognised.

Step 4: Map out your supporting R&D activities

Supporting activities are activities directly related to core R&D activities. They do not need to be experimental themselves, but they must have a direct, close, and relatively proximate relationship to the core activities. For medical devices, common supporting activities include:

• Building and iterating prototypes used in core experiments.
• Collecting, organising, and analysing experimental data, including clinical data collected under an investigational device exemption (IDE) or early feasibility study.
• Maintaining dedicated laboratory equipment and controlled environments essential for the experiments.
• Training personnel to operate novel test rigs or use new measurement techniques developed as part of the core activity.

Document the link between each supporting activity and the core R&D. For instance, if your core activity is validating a new glucose sensor algorithm, the supporting activity of developing a custom data-logging app for the clinical trial is directly related.

Step 5: Register your R&D activities with AusIndustry

Before lodging your claim, you must register your R&D activities with AusIndustry. This is a separate step from your tax return. Registration must be done within 10 months after the end of your income year. For example, if your income year ends 30 June, the registration deadline is usually 30 April of the following year.

The Grant & R&D Discovery and Matching feature within GrantsMAX helps you identify which activities may be eligible, but you still need to register directly with AusIndustry via the online portal. The registration requires you to describe each core activity and the expected supporting activities. Take the time to write accurate, specific descriptions: these form the basis of the compliance review.

Pro tip: Register early. The deadline is strict, and late registration can only be accepted in very limited circumstances. Keep your descriptions broad enough to cover the work you actually did, but specific enough to reflect the genuine uncertainties.

Step 6: Keep contemporaneous records, the evidence is non-negotiable

The R&D Tax Incentive is substantiation-heavy. The ATO expects you to keep records that prove the eligible expenditure and the R&D activities. For medical device companies, this evidence often already exists in your quality management system. Good documentation practice is your friend.

Essential records include:

• Project plans and design reviews.
• Laboratory notebooks (signed and dated).
• Test protocols, raw data, and analysis.
• Software version control logs and algorithm development documents.
• Time-tracking records that apportion employee hours to R&D projects.
• Contracts and invoices for third-party R&D services.
• Meeting minutes that discuss technical challenges and experimental decisions.

The GrantsMAX browser connector securely connects to Xero, MYOB, QuickBooks, Microsoft 365, and Google Workspace to gather accounting data and related documents, so your evidence trail can be assembled more efficiently. But the quality and completeness of the narrative remains your responsibility, and your registered tax agent will review everything before lodgement.

Resources such as Endeavor Advisors' guide detail U.S. documentation requirements, which are analogous: the principle of showing a clear link between expenditure and experimental activity is universal. The ATO will expect similar rigour.

Step 7: Calculate your eligible R&D expenditure

Eligible expenditure, often called notional deductions, is what you claim the offset on. The main categories are:

• R&D salary and wages: for employees performing or directly supporting R&D.
• Consumables: items used up during the R&D activities.
• Expenditure on associate R&D entities: amounts paid to a related party for R&D services.
• Contract R&D expenditure: payments to an unrelated entity for R&D services, but only if certain conditions are met (and a special top-up calculation may apply).
• Overhead allocation: a reasonable apportionment of general overheads such as rent, power, and IT, directly relatable to R&D.

The ATO publishes detailed guidance on expenditure, including the concept of "at risk" expenditure. Do not guess rates or thresholds. Check the current income year's rates with the ATO, because the refundable offset rate for small entities is currently 43.5% (as per the ATO for the 2023-24 income year), but this can change.

Medical device companies often have material consumable costs: reagents, catheters, sensors, sterile packaging, animal models, and prototype materials. Each cost must be directly linked to an eligible activity.

Step 8: Prepare an evidence-backed application pack

Once you have identified your core and supporting activities, registered with AusIndustry, and calculated your expenditure, you need to assemble a pack for your tax agent. This pack typically includes:

• The AusIndustry registration number.
• Detailed technical descriptions of each core activity (the narrative).
• A mapping of expenditure to activities.
• Supporting evidence: test reports, lab notebook scans, design history files.
• A schedule of time-tracking records and payroll data.

The GrantsMAX platform is built to prepare this pack from your accounting data, but it does not lodge claims. A registered tax agent reviews, refines, and lodges the claim on your behalf, and your business owns the claim. This division of responsibility is critical: GrantsMAX provides structure and evidence, the human agent provides professional judgement, and you remain accountable for what is lodged.

For first-time claimants, GrantsMAX for first-time claimants shows how the process demystifies the heavy lifting, while GrantsMAX for technology companies addresses the software and engineering narrative that often fails without robust substantiation.

Step 9: Lodge through your registered tax agent

Your tax agent will review the pack, test the eligibility assessments, validate the expenditure calculations, and ensure everything complies with current law and ATO guidance. They then lodge the claim as part of your company tax return. From that point, the ATO may review the claim, potentially asking for further evidence or clarification.

No one can guarantee an outcome. The ATO and AusIndustry actively review R&D claims, and medical device claims are scrutinised because they can be large and involve complex technical judgement. Anecdotal cases, such as the Source Advisors case study showing a contract manufacturer securing significant credits, demonstrate that with careful documentation, claims can be robust. However, every claim is unique.

Warning: Do not fall for promises of "audit-proof" claims or guaranteed refunds. The only defensible position is a claim that accurately reflects what you did, supported by contemporaneous evidence, and reviewed by a qualified professional.

Pro tips and common pitfalls

Pitfall 1: confusing routine quality control with R&D. Testing a device to a known standard to demonstrate compliance is not core R&D. The R&D is the preceding experimental work. Keep the boundary clear.

Pitfall 2: ignoring the narrative. A spreadsheet of costs without a technical story is an invitation for an ATO query. The narrative must show the systematic experimental work and the uncertainty.

Pitfall 3: missing the registration deadline. Late registration can void your claim. Set a diary reminder early in your income year.

Pitfall 4: assuming all clinical work is R&D. Clinical trials often include routine data collection. Only the experimental elements, such as testing a novel endpoint or analysis method, may qualify. Talk to your tax agent about apportioning costs.

Pitfall 5: not tracking time contemporaneously. Reconstructed timesheets are weak evidence. Use a system that captures time against projects in real time.

Conclusion and key takeaways

• The R&D Tax Incentive may be a significant source of cash for medical device companies that systematically resolve technical uncertainty.
• Eligibility flows from core and supporting activities as defined by law, not from regulatory compliance or routine engineering.
• Registration with AusIndustry and contemporaneous records are non-negotiable.
• An evidence-backed narrative, assembled from your own data, is the heart of a defensible claim.
• A registered tax agent reviews and lodges; the business owns the claim and the liability.
• GrantsMAX helps you prepare the pack, but professional advice is essential.

If you are building a medical device and tackling unknowns every day, the R&D Tax Incentive may be worth exploring. Start by reading our pricing page and our story, then contact us or book a 30-minute walkthrough to see how we prepare a pack your accountant can review. Join the GrantsMAX waitlist to stay informed about grant and incentive opportunities for Australian medical device companies.

General information only. Confirm all details with a registered tax agent for your current income year.