If you’re building a tech startup in Australia, there’s a reasonable chance someone has mentioned the R&D Tax Incentive to you. It’s one of the most significant government programs available to early-stage companies — a refundable tax offset that can put real cash back into your business. For a pre-revenue startup burning through runway, that’s not trivial.
But the program is also one of the most commonly misunderstood. Every year, companies lodge claims that get rejected, adjusted, or flagged for review because they didn’t actually understand what qualifies. The result is wasted time, repayment demands, and sometimes penalties.
Here’s what you need to know.
How the R&D Tax Incentive Works
The R&D Tax Incentive (R&DTI) is governed by Division 355 of the Income Tax Assessment Act 1997 (Cth) and jointly administered by the Department of Industry, Science and Resources (DISR) and the Australian Taxation Office (ATO).
The mechanics are straightforward. You register your eligible R&D activities with DISR, then claim the associated expenditure as a tax offset when you lodge your company tax return.
For most startups, the relevant number is 43.5%. If your company has an aggregated turnover of less than $20 million, you’re entitled to a refundable tax offset equal to your corporate tax rate (25%) plus an 18.5% premium. Refundable means exactly what it sounds like — if you’re not paying tax (and most early-stage startups aren’t), you get the offset back as cash.
To put that in dollar terms: if you spend $200,000 on eligible R&D in a financial year, you could receive $87,000 back from the ATO. That’s meaningful capital for a seed-stage company.
For companies with turnover of $20 million or more, the offset is non-refundable and the premium is either 8.5% or 16.5%, depending on R&D intensity. Most startups reading this won’t be in that category yet.
What Actually Qualifies
This is where most companies get it wrong. The R&DTI isn’t a general innovation subsidy. It doesn’t reward you for building something new. It rewards you for conducting genuine experimental activities where the outcome couldn’t be determined in advance.
The legislation distinguishes between two types of eligible activities:
Core R&D Activities
Under section 355-25, a core R&D activity must satisfy all of the following:
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Experimental in nature. The activities must involve a systematic progression of work based on principles of established science, proceeding from hypothesis to experiment, observation, and evaluation.
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Outcome not known in advance. The outcome of the experiment could not be known or determined in advance on the basis of current knowledge, information, or experience — by a competent professional in the relevant field.
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Purpose of generating new knowledge. The activities must be conducted for the purpose of generating new knowledge, including new knowledge in the form of new or improved materials, products, devices, processes, or services.
That second requirement is critical and is the one most startups stumble on. The test isn’t whether you knew the outcome. It’s whether a competent professional in the field could have determined it. If an experienced software engineer could look at your problem and say “yes, that approach will work,” then you don’t have a core R&D activity — even if you’d never built it before.
Supporting R&D Activities
Under section 355-30, supporting activities are those directly related to core R&D activities. They don’t need to be experimental themselves, but they must be undertaken for the dominant purpose of supporting the core activity. Data collection, testing environments, and prototype fabrication are common examples — provided they’re tied to a genuine core activity.
What Doesn’t Qualify
The legislation contains explicit exclusions. Even if the work looks experimental, it won’t qualify if it falls into these categories:
- Market research, market testing, or sales promotion
- Management studies or efficiency surveys
- Routine quality control or testing
- Commercial, legal, or administrative activities
- Software developed for your own internal administration (even if it’s technically novel)
- Activities related to compliance with statutory requirements
- Prospecting, exploring, or drilling for minerals
The internal administration software exclusion catches a lot of tech companies off guard. If you’re building a custom CRM or internal workflow tool, it doesn’t qualify as a core R&D activity — no matter how technically challenging the build was. It may still qualify as a supporting activity if it’s directly related to an eligible core activity, but it can’t stand on its own.
Common Pitfalls
Having seen numerous R&D claims — some successful, some not — these are the mistakes that come up again and again.
1. Confusing “New to Us” with “New to the Field”
The most common error. A startup builds something it hasn’t built before and assumes the work qualifies. But the R&DTI doesn’t care about novelty to your company. It cares about whether the outcome could have been determined by a competent professional. If you’re implementing a well-understood architecture in a new context, that’s engineering — not R&D.
2. Poor Contemporaneous Records
The ATO and DISR expect documentation created during the R&D activities, not reconstructed after the fact for the purpose of making a claim. You need records of your hypotheses, experimental methodology, variables tested, results observed, and conclusions drawn. Screenshots, commit logs, Slack messages, and project management exports can all count — but they need to exist and tell a coherent story.
If your development process is entirely agile with no written records of what was tested, why, and what was learned, you’ll have a problem.
3. Claiming Whole Projects Instead of Specific Activities
Companies often register an entire project as R&D when only specific activities within it qualify. Building a new SaaS product isn’t R&D. Specific experiments within that build — testing whether a particular algorithm can achieve a performance threshold that no known approach has achieved, for instance — might be. You need to identify and isolate the eligible activities from the routine development work.
4. Missing the Registration Deadline
You must register your R&D activities with DISR within 10 months of the end of the income year in which they were conducted. For a standard 30 June year-end, that’s 30 April of the following year. Miss this deadline and you cannot claim the offset. It’s not extendable and it’s not forgivable.
5. Wrong Entity Structure
Only a company (incorporated under Australian law, or certain foreign corporations) can be an R&D entity. If you’re operating through a trust, partnership, or sole trader structure, you’re ineligible. This catches founders who haven’t yet incorporated or who are running R&D through the wrong entity in a group structure.
6. Dodgy Expenditure Apportionment
Not all of a developer’s time is R&D, even if they’re working on an R&D project. You need to reasonably apportion costs between eligible and ineligible activities. The ATO looks closely at claims where 100% of a team’s salary has been allocated to R&D — it’s rarely accurate and it’s a red flag for review.
Eligible expenditure typically includes salaries, contractor fees, materials consumed, and depreciation of assets used in R&D. But each category needs evidence and reasonable allocation.
The Practical Process
For a startup claiming the R&DTI for the first time, the process looks like this:
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Plan and document from the start. Before you begin R&D activities, identify what you’re testing and why. Maintain records throughout.
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Register with DISR. Submit your application through the R&D Tax Incentive portal within 10 months of your income year end. You’ll describe your core and supporting activities and explain why they meet the eligibility criteria.
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Lodge with the ATO. Include the R&D Tax Incentive schedule in your company tax return, referencing your DISR registration number.
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Receive your offset. For eligible companies under $20 million turnover, the refundable offset is paid as part of your tax assessment — typically as a cash refund.
Registration is a self-assessment process. DISR confirming your registration doesn’t mean your activities are eligible. Both DISR and the ATO can — and do — review claims after registration, sometimes years later.
Should You Use an R&D Adviser?
Probably, yes — at least for your first claim. The eligibility criteria are technical and the consequences of getting it wrong include repayment of the offset plus potential penalties. A specialist R&D adviser can help identify eligible activities, prepare the registration application, and ensure your documentation meets the standard the ATO expects.
That said, not all R&D advisers are equal. Some take an aggressive approach to eligibility that doesn’t survive scrutiny. Choose someone who gives you honest advice about what qualifies rather than telling you what you want to hear.
The Bottom Line
The R&D Tax Incentive is one of the best funding mechanisms available to Australian startups. A 43.5% refundable offset on genuine R&D expenditure is extraordinarily generous by global standards. But it’s not free money for building software. It requires genuine experimental activity, proper documentation, and accurate claims.
Get it right and you’ve got a significant source of non-dilutive funding. Get it wrong and you’ve got an ATO review, a repayment demand, and a lesson you didn’t need to learn the hard way.
If you’re planning to claim the R&DTI and want to make sure your activities and documentation are on solid ground, get in touch.
