As a business owner in Australia, securing funding to drive innovation is often a top priority. The two key options are the R&D Tax Incentives (R&DTI) and other government grants. A question frequently arises about whether receiving a grant affects your ability to claim the R&D Tax Incentive.
This concern is valid, given the complexity of government funding rules. The good news? Grants and R&D tax incentives can work together to support your business, but the impact depends on the type of grant you receive.
In this blog post, we’ll discuss how different types of government grants interact with the R&D Tax Incentive. You will read the practical examples, clarify common misconceptions and outline eligibility factors. Whether you’re a startup or an established business, understanding the relationship between grants and R&D Tax Incentives can help you make informed decisions to fund your R&D activities. Let’s dive in and see how you can use both to your advantage.
Understanding Government Grants and R&D Tax Incentives in Australia
To grasp how these funding sources interact, defining what they are and how they function is helpful.
What Are Government Grants?
Government grants provide upfront funding to support specific projects, often tied to innovation or R&D. These can come from federal, state, or local governments and are usually non-repayable. Examples include the Innovation Connections Grant, the Victorian R&D Funding Program, and the Biomedical Translation Fund. Each grant has its purpose, eligibility criteria, and conditions, which can affect how it interacts with the R&D Tax Incentive.
How Grants Impact R&D Tax Incentive Claims
A common misconception is that receiving a grant disqualifies you from claiming the R&D Tax Incentive. That is not true, and you can claim both! However, the grant type specifies how it affects your R&D tax offset.
What is the R&D Tax Incentive?
The R&D Tax Incentive is a federal program administered by
Also known as R&DTI, it enables businesses to invest in R&D by offering a tax offset for eligible activities. The offset varies based on your company’s aggregated turnover:
- Refundable Tax Offset: Businesses with a turnover under $20 million can claim a 43.5% refundable offset (25% corporate tax rate + 18.5% premium). If this exceeds your tax liability, you receive the difference as a cash refund.
- Non-Refundable Tax Offset: For businesses with a turnover of $20 million or more, the offset ranges from 33.5% to 46.5%, depending on R&D intensity, and reduces your tax liability without a cash refund.
Eligible R&D activities must involve experimentation to create new knowledge or solve technical uncertainties, such as developing a new product or process.
The main differences between R&D Tax Incentives and other grants in Australia
| Aspect | R&D Tax Incentives | Other Grants |
| Nature of Support | Provides a tax offset or refund based on eligible R&D expenditures. | Offers direct funding or financial assistance for specific projects or purposes. |
| Eligibility Criteria | Companies must self-assess and register their R&D activities with the Department of Industry. | Eligibility criteria vary by grant and are often tied to specific industries, regions, or goals. |
| Application Process | Self-assessed; companies must register R&D activities annually and claim them through their tax return. | Competitive application process; businesses must apply before project commencement. |
| Timing of Benefit | Claimed after the end of the financial year as part of the tax return process. | Funding is often provided upfront or in stages during the project. |
| Purpose | Encourages businesses to undertake R&D they might not otherwise afford by reducing tax liability. | Targets specific outcomes, such as job creation, regional development, or commercialization. |
| Flexibility | Broadly applicable across industries and R&D activities meeting eligibility requirements. | Limited to specific industries, sectors, or predefined objectives outlined by the grant provider. |
| Impact on Other Funding | Receiving other government funding may reduce eligible R&D expenditure for the tax incentive claim. | Some grants may restrict businesses from accessing other funding sources for the same project. |
| Administration | Jointly administered by the ATO and the Department of Industry, Science and Resources (DISR). | Administered by various government departments or agencies based on grant type and purpose. |
| Focus Areas | Focuses on innovation through systematic experimentation and technical risk in R&D projects. | Often focuses on broader goals like economic growth, sustainability, or regional development. |
The Role of Recoupment
The ATO uses “recoupment” to describe grants reimbursing specific R&D expenses. If a grant is classified as a recoupment, it reduces the expenditure you can claim under the R&D Tax Incentive. This rule prevents “double-dipping”—claiming the same expense through multiple government programs.
- Grants as Recoupment: If a grant directly covers R&D costs (e.g., salaries or materials), that amount is subtracted from your eligible R&D expenditure.
- General Funding Grants: If a grant provides broad support without targeting specific R&D costs, it typically doesn’t reduce your R&D claim.
Since 2022, the ATO has refined how recoupments are calculated through a “clawback adjustment,” adding an extra layer of complexity to ensure fairness.
Regulation of Grants and R&D Tax Incentives
The ATO and DISR regulate the interaction between grants and R&D tax incentives to maintain integrity. The refundable offset significantly benefits small to medium enterprises (SMEs) with a turnover under $20 million. However, recoupment rules can limit the cash refund if grant funding overlaps with R&D costs. The ATO and AusIndustry (part of DISR) share information to ensure compliance, making accurate record-keeping essential.
Example Calculation
Imagine your business, with a turnover under $20 million, spends $150,000 on R&D activities and receives a $60,000 grant tied to those costs:
- Total R&D Expenditure: $150,000
- Grant (Recoupment): $60,000
- Eligible R&D Expenditure: $150,000 – $60,000 = $90,000
- Tax Offset (43.5%): $90,000 × 0.435 = $39,150
Without the grant, your offset would be $150,000 × 0.435 = $65,250. The grant reduces your refund by $26,100, showing how recoupment impacts SMEs.
Eligibility Factors for R&D Tax Incentives and Grants
To benefit from both funding sources, you need to meet specific criteria.
R&D Tax Incentive Eligibility
- Business Type: Must be an Australian incorporated entity.
- Activities: R&D must involve experimentation and technical risk and be registered with DISR before claiming.
- Expenditure: Costs like wages, materials, and depreciation qualify if tied to R&D.
Government Grant Eligibility
Grant criteria vary by program:
- Project Scope: Must align with the grant’s purpose (e.g., innovation, commercialisation).
- Business Size/Location: Some grants target SMEs or specific regions.
- Conditions: May require matching funds or transparency about other funding, like the R&D Tax Incentive.
The example above shows that grants tied to R&D costs can reduce the refundable offset for SMEs. General funding grants have a lesser impact on preserving your complete R&D claim.
Practical Examples of Grant and R&D Tax Incentive Interactions
Let’s look at two scenarios to illustrate these effects.
Example 1: General Funding Grant
Your startup receives a $50,000 grant from the Victorian R&D Funding Program to boost innovation, not tied to specific costs. You spend $120,000 on R&D activities:
- Eligible R&D Expenditure: $120,000 (no recoupment)
- Tax Offset (43.5%): $120,000 × 0.435 = $52,200
You can make as many R&D claims as possible so the grant won’t affect your refund.
Example 2: Project-Specific Grant
You receive a $75,000 Innovation Connections Grant for a $200,000 R&D project. The grant covers specific development costs:
- Eligible R&D Expenditure: $200,000 – $75,000 = $125,000
- Tax Offset (43.5%): $125,000 × 0.435 = $54,375
Without the grant, your offset would be $87,000. The financial impact is a $32,625 reduction in your refund, highlighting the recoupment effect.
Why General Grants Have Less Impact
General funding grants add to your income without targeting R&D expenses, leaving your complete expenditure eligible for the tax offset. Project-specific grants, like those from the Biomedical Translation Fund, trigger recoupment, reducing your claim but still providing upfront cash.
Choosing Grants Wisely to Maximise R&D Tax Incentives
Strategic planning is key to getting the most out of Grants and R&D Tax Incentives. Here are some tips:
- Read the Grant Documentation Carefully: Check if the grant is a recoupment. Terms often specify whether they affect R&D claims (e.g., Accelerating Commercialisation grant rules).
- Separate Costs: Use grants for capital expenses (e.g., equipment) and the R&D Tax Incentive for operational costs (e.g., staff). This avoids overlap.
- Consult Experts: An R&D tax specialist can clarify how a grant impacts your claim, ensuring compliance and optimal funding.
- Plan Ahead: Opt for general funding grants to preserve your R&D offset, mainly if you rely on cash refunds.
For instance, a biotech firm might use a $500,000 Biomedical Translation Fund grant for clinical trials and claim the R&D Tax Incentive on separate lab costs, avoiding double-dipping while securing both benefits.
Conclusion
Grants and R&D Tax Incentives offer Australian businesses a powerful way to fund innovation, but their interaction depends on the grant type. General funding grants leave your R&D claim intact, while project-specific grants reduce it through recoupment. You can access both funding sources effectively by understanding eligibility, tracking expenses, and choosing grants wisely.
Disclaimer and Free Consultation Offer
Government grants and R&D tax incentives are intricate and constantly evolving. While this guide provides valuable insights, each business’s financial landscape is unique and requires personalised attention.
Our team of grant consultants brings over 30 years of specialised experience in Australian government funding. Innumerable businesses have relied on us to help them navigate the complex world of R&D tax incentives and grants, maximising their innovation funding potential.
Are you confused? How might grants impact your R&D tax incentives? Unsure about your eligibility?
Book a FREE 45-minute consultation with our expert team today.
- Our team will review your specific business situation
- Once the review is completed, tailored advice on grant and R&D tax incentive strategies will be provided.
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