Key points
- The refundable/non‑refundable distinction is the starting point for determining whether R&D offsets are accounted for as grants (AASB 120) or income taxes (AASB 112).
- Refundable offsets are usually accounted for as government grants, while non‑refundable offsets are typically treated as income tax.
- The most common problems are premature recognition, inconsistent policies and thin disclosures that fail to explain where the benefit is recorded and what judgements support it.
Australia’s Research and Development (“R&D”) Tax Incentive can materially change reported results, yet many entities still have unclear or inconsistent accounting policies. This article considers current practice in accounting for R&D tax incentives, which may fall under AASB 120 Accounting for Government Grants and Disclosure of Government Assistance or AASB 112 Income Taxes.
Current regime
The Australian Government’s R&D Tax Incentive is the main tax‑based program used to encourage companies to undertake genuine research and development in Australia. The regime lowers the after‑tax cost of eligible R&D by providing a tax refund or tax offset. It is targeted at companies, with a view to driving additional R&D in Australia, particularly in innovation‑intensive sectors such as technology, biotechnology and advanced manufacturing.
The accounting policy does not change the amount of the offset under the tax law, but it can significantly affect EBITDA, reported tax rate and the timing of profit recognition.
Refundable vs non‑refundable offsets
- Companies with aggregated turnover under $20 million are generally eligible for a refundable R&D tax offset, which can generate a cash refund when the company is in a tax loss position.
- Companies with aggregated turnover of $20 million or more receive a non‑refundable offset, which can reduce current tax and, to the extent unused, can usually be carried forward to future years.
This distinction is the starting point for determining the appropriate accounting treatment.
Accounting guidance
For most entities, the first question is: is the offset refundable or non‑refundable?
- Refundable offsets are commonly treated as government grants under AASB 120. The benefit is recognised in profit or loss or capitalised against R&D assets, depending on the underlying expenditure. Many entities present the income as other income or as a reduction of R&D expenditure to reflect the net cost of innovation. Where development costs are capitalised under AASB 138 Intangible Assets, the related portion of the R&D incentive is generally offset against the capitalised development cost. In practice this can result in part of the benefit being recognised in profit or loss and part in the balance sheet. Where the benefit is linked to a capitalised asset, the grant may be deferred as deferred income and recognised in profit or loss over the useful life of the asset to match the amortisation pattern.
- Non‑refundable offsets are generally treated under AASB 112 and recorded as a reduction to current income tax expense. This keeps the benefit within the effective tax rate narrative rather than operating performance. Any carried‑forward non‑refundable R&D tax offsets are treated like unused tax credits. A deferred tax asset is recognised only to the extent it is probable that sufficient future taxable profits will be available.
- A less common approach is a hybrid model, where a “tax rate equivalent” portion of the benefit (for example, at 25% or 30%) is treated under AASB 112 and any excess premium above the statutory tax rate is treated as a grant under AASB 120.
Whatever approach is adopted, it is important to apply it consistently year on year and to explain it clearly in the accounting policies.
Timing of recognition
Recognition should occur only when there is reasonable assurance (AASB 120.7) that the underlying R&D activities qualify and the claim will be accepted. In practice, this means considering factors such as:
- whether the R&D activities meet the legislative criteria;
- the quality of documentation;
- the status of AusIndustry registration for the relevant year; and
- any known clawback or review risks.
Recognising income too early exposes the entity to the risk of later reversals if claims are reduced or denied.
Common mistakes
Common pitfalls include:
- Recognising the benefit too early, for example when budgets are prepared or projects are approved, rather than when eligibility is sufficiently supported and a robust claim has been prepared or lodged.
- Treating AusIndustry registration as automatic eligibility, without ensuring activities and expenditure actually meet the R&D tests, which can lead to reversals if claims are later adjusted.
- Applying different treatments across group entities or changing the policy from year to year without a clear explanation of the rationale and its impact.
- Relying on generic boilerplate disclosures that do not explain whether the R&D incentive is treated as a grant or as a tax item, where it appears in the statement of profit or loss, or what key judgements and assumptions underpin the treatment.
A clear policy anchored in the refundable/non‑refundable distinction, applied consistently and supported by robust documentation, will help avoid surprises in both financial reporting and tax reviews.
