What R&D expenditure can you claim? A breakdown

Understanding R&D expenditure for the incentive

If your Australian business is conducting eligible R&D activities, you may be able to claim a tax offset that can meaningfully improve your cash position. The R&D Tax Incentive, administered jointly by the Australian Taxation Office (ATO) and the Department of Industry, Science and Resources, allows eligible companies to claim a refundable or non-refundable offset based on their notional R&D deduction. But what types of expenditure actually qualify? This guide walks through the key categories, how the ATO treats them, and how GrantsMAX helps you build a defensible claim.

The R&D Tax Incentive is not a simple expense deduction; the offset is calculated on a notional deduction amount that you calculate specifically for the incentive. The ATO sets specific rules about what costs can be included. Getting this right is critical because overclaiming can trigger a review, and underclaiming means leaving money on the table.

GrantsMAX is an AI grant agent that connects to your own accounting data, read-only from Xero, MYOB, QuickBooks, Microsoft 365, or Google Workspace, and discovers what government grants and R&D tax incentives your business may be eligible for. It then prepares a complete, evidence-backed application pack for your registered accountant to review and lodge. The business owns the claim, and your accountant maintains the professional relationship.

In this article, we break down the eligible expenditure categories step by step, drawing on ATO guidance and practical experience. Remember, this is general information, not tax or financial advice. You should always confirm the current rules for your income year with a registered tax agent.

Prerequisites: Get your foundations right

Before you can map your expenditure, you need to be confident your R&D activities meet the eligibility criteria. The R&D Tax Incentive overview explains core versus supporting R&D activities, but here is the quick foundation:

1. Register your R&D activities with AusIndustry before lodging your company tax return. Registration is mandatory for each income year you want to claim.
2. Your R&D must involve a systematic, experimental approach aimed at generating new technical knowledge or creating new or improved materials, products, devices, processes, or services. For R&D-active software companies, manufacturers, biotech and agtech businesses, and many others, this threshold is achievable with proper documentation.
3. You must be an eligible R&D entity, typically a company incorporated under Australian law, or a foreign company that is a resident for tax purposes and carries on R&D in Australia.
4. Your accountant or tax agent should be engaged early. GrantsMAX's eligibility assessment can flag areas of risk before you go too far, but it does not replace professional advice.

Once you are registered and have identified your R&D projects, the next step is to categorise the associated costs according to the ATO's treatment.

Step 1: Understand what the ATO calls a notional deduction

The starting point is the concept of a notional deduction. Your R&D tax offset is calculated as a percentage (set by the government and published by the ATO for each income year) of your notional R&D deduction. That percentage depends on your aggregated turnover and whether you are claiming the refundable or non-refundable offset. For example, for the 2023-24 income year, the refundable R&D tax offset for companies with aggregated turnover below $20 million is 43.5%, but you should verify the current rate for your year because rates can change.

The notional deduction is the total of your eligible R&D expenditure, calculated under special rules that differ from ordinary income tax deductions. The ATO requires you to work out this notional amount using the "R&D expenditure" definition in the Income Tax Assessment Act 1997. That definition includes specific categories, each with its own conditions. The key categories, salaries, contractors, overheads, materials, and depreciation, all feed into this total.

Similar R&D incentive regimes exist overseas. In the UK, HM Revenue and Customs provides detailed guidance on qualifying expenditure for the R&D tax relief schemes, and in the United States the IRS outlines how the research credit works. While the specifics differ, the principle of needing to link costs directly to eligible R&D activities is universal.

Pro Tip: Keep a clear mapping of each cost item to a specific R&D activity. This makes it easier for your accountant to review the notional deduction calculation and defend it if the ATO asks questions.

Step 2: Identify and allocate salaries and wages of R&D staff

Salaries and wages typically form the largest chunk of R&D expenditure for labour-intensive R&D. The ATO allows you to claim salary costs for employees who directly perform R&D activities or who provide direct support to those activities. This includes:

• Base salary or wages
• Overtime payments
• Employer superannuation contributions (capped at a percentage of the salary earned during R&D time)
• Payroll tax allocated to those wages

You cannot claim costs for staff who have only an indirect or administrative connection to the R&D. The time you allocate must be reasonable and documented. For example, a software engineer writing and testing new code for an eligible experimental development project can have their wages fully or proportionally included, depending on the time spent. A receptionist answering phones for the whole company would not qualify.

For R&D-active startups and growing technology companies, a common pitfall is failing to track time accurately. The ATO expects contemporaneous records, timesheets, project allocation logs, or similar evidence. GrantsMAX's audit-ready evidence trail pulls data from your timesheets and invoices to create a clear mapping of staff time to R&D activities, so your accountant can easily verify the allocation.

Warning: Do not include salaries that are already covered by a government grant or that relate to activities performed outside Australia unless the R&D is conducted as an overseas activity that meets the ATO's strict tests. Also, only include the portion of salary that corresponds to the time spent on R&D.

Step 3: Account for contractor costs

Many R&D-intensive businesses use independent contractors for specialised work. The ATO allows you to include expenses paid to an external contractor (who is not your employee) if the contractor's work is directly related to eligible R&D activities. This can include:

• Fees for research scientists, engineers, or software developers engaged under a contract
• Payments for prototype fabrication or testing by an external firm
• Payments to contract research organisations for specific experimental work

You must have a written contract that clearly defines the scope of the R&D work. The cost is included at the amount you actually paid (or are liable to pay) in the income year. For example, if you engaged a university to run a series of clinical trials for a new medical device, those fees may be eligible, provided the work meets the definition of core or supporting R&D activities. The UK's R&D Expenditure Credit (RDEC) scheme provides a similar mechanism for subcontractor costs, which can be a helpful reference for the principle.

A Bloomberg Tax practitioner guide to U.S. R&D credits highlights the importance of distinguishing between "qualified research" and general business services, the same nuance applies in Australia. If a contractor does work that is routine or not part of a systematic experimental process, those costs will not be eligible.

GrantsMAX helps by drafting the cost structure directly from your Xero or MYOB data, pulling contractor invoices and matching them to R&D project narratives. Your accountant then reviews the allocation to ensure each contractor cost meets the ATO's criteria.

Step 4: Capture overheads and operational costs

Overheads are often the most underclaimed category because they require careful apportionment. The ATO's definition includes:

• Rent or lease costs for the premises used for R&D
• Utilities (electricity, water) attributed to the R&D space
• Computer software and data storage costs directly related to R&D
• General laboratory or workshop consumables that are not individually capitalised

You can only claim the proportion of these costs that relates directly to the R&D activity. For example, if your R&D lab occupies 20% of your leased floor area, you can include 20% of the rent as an eligible overhead. The same proportional logic applies to electricity and other shared services.

For small businesses that operate from home or from a small office, it is still possible to claim a reasonable allocation if you have a clearly defined R&D workspace. The ATO is known to scrutinise overhead allocations, so documentation is essential, floor plans, meter readings, or workstation counts can support your claim.

Pro Tip: Use your accounting software's tracking categories to tag R&D-related expenses throughout the year. When you connect your data to GrantsMAX, the system can automatically isolate these tagged costs and incorporate them into the notional deduction calculation, saving your accountant hours of manual work.

Overheads do not include things like general corporate overhead (executive salaries, investor relations), debt-servicing costs, or the cost of raising capital. A well-organised claim separates these clearly.

Step 5: Materials, consumables, and asset depreciation

Physical inputs and capital assets used in R&D also count toward the notional deduction. This category includes:

• Raw materials and components that are consumed or transformed during R&D
• Prototypes, models, or samples that are built and tested
• Consumables such as chemicals, reagents, or filters
• The decline in value (depreciation) of plant and equipment used specifically for R&D

For example, a manufacturer developing a new composite material may claim the cost of the base materials that are consumed in test batches, as well as the depreciation on mixing machinery. A software company developing an AI engine may claim the cost of cloud computing resources that are exclusively used for the development.

Depreciation is calculated using the effective life of the asset, but only the proportion of use that is for R&D is eligible. If a piece of equipment is used 50% for R&D and 50% for production, you can claim 50% of its decline in value. The ATO's rules for depreciating assets used in R&D can be complex, so professional advice is crucial.

The IRS's explanation of qualifying expenses for the U.S. research credit, as outlined in Form 6765 instructions, echoes the need to tie material costs directly to qualified research. The principle is the same here.

GrantsMAX's evidence trail helps you index purchase invoices, asset registers, and usage logs so that your accountant can substantiate each material and depreciation line.

Step 6: Document everything, the evidence trail

The ATO and AusIndustry can review your R&D claim at any time, and the burden of proof lies with you. Good documentation is the most effective way to mitigate that risk. The key evidence types include:

• Contemporaneous records that show the R&D activities were undertaken (e.g., lab notebooks, design logs, version control histories, project progress reports)
• Timesheets or time allocation records for R&D staff and contractors
• Invoices and receipts for contractor fees, materials, and consumables
• Lease agreements for premises, and utility bills where claiming overheads
• Asset registers and depreciation schedules

The ATO's website provides guidance on what it expects, but in practice, the standard is high. A UK practitioner article on making a successful R&D claim emphasises that keeping a detailed, contemporaneous record of expenditure and activities is the single biggest factor in a smooth claim process, and that advice is just as relevant in Australia.

GrantsMAX was built to address the documentation gap. Its audit-ready evidence trail pulls together emails, invoices, timesheets, and other digital records, then ties each activity and cost line in the application pack back to its source. This creates an index that your accountant can review quickly and that holds up under scrutiny.

Warning: Never manufacture or backdate records. The ATO can impose penalties for false or misleading statements. Always work with your real data and records.

Step 7: How GrantsMAX and your accountant bring it together

Once you have identified your eligible expenditure categories and gathered your records, the next step is to compile a claim. This is where the GrantsMAX workflow becomes valuable. Learn why GrantsMAX differs from directories and old-school consulting.

1. Discovery and matching: GrantsMAX continuously scans government grants and R&D tax incentives and matches them to your business using your own accounting data. It highlights what you may be eligible for, so you do not miss opportunities.
2. Application pack drafting: Using your connected data, the system drafts a complete pack that includes R&D activity narratives, a cost breakdown of salaries, contractors, overheads, materials, and depreciation, and an evidence index. This is not lodged automatically; it is prepared for review. Learn more about pack drafting.
3. Eligibility assessment and risk flags: Before the pack reaches your accountant, GrantsMAX flags areas that a reviewer would scrutinise, giving you a chance to firm up evidence.
4. Accountant review and lodge workflow: The pack is delivered to your registered accountant through a shared workspace. The accountant reviews, refines, and lodges the claim with the ATO, maintaining full control. Your business owns the claim at every step.
5. Annual refresh: The R&D Tax Incentive and many grants repeat each financial year. GrantsMAX refreshes each claim from your latest data, so you and your accountant can efficiently prepare the next year's claim.

This division of responsibility is crucial: GrantsMAX is an AI tool that prepares evidence-backed material, it does not lodge, file, or guarantee any claim or outcome. A registered tax agent or accountant makes the professional decisions and lodges with the ATO. This approach aligns with Tax Practitioners Board requirements and gives you confidence in the integrity of your claim.

Who it is for spans startups, tech companies, manufacturers, and accountants themselves. If you are an accounting firm, the accountant channel allows you to white-label the workflow and run it across your client base.

Pro tips and common pitfalls

• Pitfall: Assuming that all R&D salaries are 100% eligible. Remedy: Maintain granular time tracking.
• Pitfall: Overlooking the superannuation cap on claimed salaries. Remedy: Verify the cap with the ATO's current instructions.
• Pro Tip: Use the GrantsMAX eligibility assessment early in the year to identify weak spots in your documentation.
• Pitfall: Claiming costs that relate to activities not registered with AusIndustry. Remedy: Align your registration with your cost allocation.
• Pro Tip: Engage your accountant before the end of the financial year. They can advise on structuring R&D projects to optimise the notional deduction.

The international resources we referenced, from the UK's ForrestBrown guide to the Bloomberg Tax analysis, all stress the importance of professional oversight. In Australia, that means your registered tax agent is your best safeguard.

Key takeaways: what R&D expenditure you can claim

• The R&D Tax Incentive provides a refundable or non-refundable offset based on a notional deduction of eligible expenditure.
• Salaries, contractor fees, overheads, materials, and depreciation are the main claimable categories, each subject to ATO rules.
• Accurate allocation and documentation are non-negotiable; without them, a claim is at risk.
• GrantsMAX helps you prepare an evidence-backed application pack from your accounting data, but a registered accountant reviews and lodges it, no AI filing, no guarantees.
• The process repeats annually, and with GrantsMAX's annual refresh, staying on top of your claims becomes systematic.

If you are ready to turn your R&D investment into a well-supported claim, join the GrantsMAX waitlist and be among the first to put your accounting data to work. Your accountant will thank you.