Key considerations for manufacturers claiming the R&D Tax Incentive (RDTI)

Why is the RDTI important for manufacturers? 

Cash flow is often a key pain point for the manufacturing sector. Inventory, raw materials, labour and production overheads can add up to significant operating costs, reducing cash availability for investment in innovation. Fortunately, several government grant programs exist to lower costs of research and development (R&D) investment by Australian manufacturers. As key advisers to the manufacturing sector, we often assist our manufacturer clients in accessing this support. 

An avenue of support that may be less well-known to the sector is the R&D Tax Incentive (RDTI). Where certain conditions are satisfied, the RDTI regime provides companies with a tax offset of up to 48.5% of the costs of undertaking R&D activities.  

The Department of Industry, Science and Resources (DISR)’s first annual RDTI transparency report (released in 2024) showed that less than 3% of Australia’s ~89,000 manufacturing companies claimed the RDTI in the 2021-2022 year. Not all Australian manufacturers will undertake activities that satisfy the legislative requirements of the RDTI. However, the relatively few manufacturers claiming the RDTI suggests some manufacturers may not be familiar with RDTI’s benefits or requirements.  

This article steps through why, in addition to grants, the RDTI is an important funding mechanism for manufacturers investing in innovation, and outlines key considerations for those making an RDTI claim. 

Key differences between grants and RDTI     

While both government grants and RDTI programs require lodgement of an application in order to secure funding in relation to specific activities, there are key distinctions between the two funding mechanisms. 

Grants are typically prospective, requiring lodgement of an application prior to a project commencing. Grant recipients will typically be unable to commence grant-funded project activities and start incurring expenditure before a Funding Agreement is executed with the relevant funding body. 

In contrast, the RDTI is a retrospective funding mechanism. An RDTI application enables companies to claim a tax offset in relation to R&D activities and expenditure already undertaken in the most recently complete financial year. Companies have 10 months from the end of a financial year to submit an RDTI application. 

Most grant programs available to manufacturers are competitive funding opportunities, requiring companies to outperform other applicants against merit criteria to secure funding. In contrast, the RDTI involves a non-competitive, self-assessment process. This requires manufacturers to assess whether their R&D activities and expenditure meet the legislative requirements of the RDTI.    

RDTI legislative requirements  

RDTI – Core R&D activities 

RSM often works with companies underclaiming or missing out on the RDTI due to the misconception that R&D is restricted to industries traditionally associated with research, such as the biotech sector. However, the definition of R&D activities under the RDTI is broader than many companies realise, as outlined below, and can allow claims from a diverse range of sectors, including the manufacturing sector. 

An R&D tax offset can be claimed on the costs of conducting core and supporting R&D activities. A core R&D activity must: 

• seek to resolve a technical problem which cannot be solved using existing knowledge;
• involve a systematic process based on scientific methods, proceeding from hypothesis to experimentation, observation and logical conclusions; and
• aim to create new knowledge, or new and improved materials, products, devices, processes or services. 

DISR’s sector guide, Manufacturing and the R&D Tax Incentive provides examples of core R&D activities which can potentially be included in an RDTI claim. These activities include the design and development of a new or improved: 

• product, material or component.
• embedded software.
• production process.
• integration of components to improve performance. 

However, several activities relevant to manufacturers are excluded from being registered as core R&D activities, including:  

• complying with statutory requirements or standards (such as GMP manufacturing compliance);
• undertaking market research or testing; and
• conducting management studies or efficiency surveys (such as measuring cost and time savings or energy efficiency of operations). 

RDTI – Supporting R&D activities 

Activities that do not satisfy the above criteria but are required for a core R&D activity to proceed may be registered as supporting R&D activities. DISR’s manufacturing sector guide provides a snapshot of supporting R&D activities which can potentially be included in an RDTI claim: 

• background research to inform design and development of an experimental process;
• manufacture or assembly of components, prototypes or scaled up units to enable an experiment to be conducted; and
• development of hardware required for the assessment of new or improved control systems. 

A supporting R&D activity may have multiple purposes, including achieving commercial, regulatory and R&D-related objectives. However, as concluded in the 2022 Moreton Resources case, a supporting R&D activity with multiple purposes may be registered with DISR if a company can show that: 

• the supporting activity is required for the core R&D activity to proceed; and
• the activity’s purpose of supporting a core R&D activity is greater than its other purposes, such as satisfying regulatory requirements. 

Key considerations for manufacturing RDTI claimants 

Substantiation 

It is expected that all companies claiming the RDTI will retain documentation in support of its RDTI claim. This can include documentation (e.g. emails, contracts, meeting notes, business and project plans, results, invoices), and if necessary, witness statements, statutory declarations, oral testimony and statements that evidence: 

It is expected that all companies claiming the RDTI will retain documentation in support of its RDTI claim. This can include documentation (e.g. emails, contracts, meeting notes, business and project plans, results, invoices), and if necessary, witness statements, statutory declarations, oral testimony and statements that evidence: 

• the purpose(s) of undertaking the R&D activities;
• when and where the activities were conducted;
• expenditure incurred on eligible R&D activities;
• time spent by staff undertaking R&D activities;
• planning, trials and results, such as prototype planning documents, manufacturing process plans, quality control reports, and batch test results;
• contracts in place between the company claiming the RDTI and third parties engaged to undertake R&D activities for the company. 

Manufacturers seeking to develop investment-ready businesses should note that potential investors are placing increasingly greater focus on the risk profile of compliance frameworks in their due diligence of target companies in the manufacturing sector. For manufacturers claiming the RDTI, compliance with RDTI requirements will be a focus of potential investors. 

Ensuring a robust RDTI governance process is critical to both the preparation of a defensible RDTI claim and unlocking potential future investment. 

Distinguishing R&D activities from business-as-usual activities 

Production-related activities may potentially qualify as R&D activities. An initial production batch may satisfy the requirements of a supporting R&D activity if it enables efficacy or another variable to be evaluated in a core activity. 

Similarly, design and development of a new manufacturing process may require iterative production trials to evaluate the effect of different combinations of equipment speeds and settings on the desired yield and quality of product. 

However, once the relevant core R&D activity’s specifications and the desired new knowledge are achieved, further production will no longer have a direct link to supporting a core R&D activity, and would likely need to be excluded from the RDTI claim. 

Manufacturers are encouraged to track production batches and costs required for R&D activities versus business-as-usual production to maximise production-related costs that can potentially be included in an RDTI claim.  

Decline in value of plant and equipment 

Manufacturers are often required to make significant investments in plant and equipment. Where these are the subject of R&D or used to facilitate R&D activities, the associated decline in value may be eligible for inclusion in an RDTI claim. 

Decline in value expenses can comprise a significant proportion of R&D expenditure claimed by manufacturers. Manufacturers are therefore advised to keep records to evidence the use of specific plant and equipment in R&D activities where decline in value is included in an RDTI claim. This could include trial records, timesheets and/or documentation to support the use of plant and equipment in R&D activities. 

Effect of government grant funding on RDTI claim 

Opportunities exist for manufacturers to apply for direct, non-dilutive grant funding where their projects align with government priorities, such as: 

• the Federal Government’s National Reconstruction Fund priority industries (such as low emission technologies, medical science and agriculture), which are a focus of several current grant programs;
• the Federal Government’s Future Made in Australia initiative, anticipated to catalyse the local manufacturing industry by supporting development of onshore capabilities required for the net zero transition. This includes direct grant funding towards R&D projects by manufacturers of green metals and clean energy technologies;
• Australian Renewable Energy Agency (ARENA)’s strategic priorities; and
• state-based priorities and policies, which may vary across states and political parties. 

Manufacturers seeking to apply for both grant funding and the RDTI need to consider the interaction of these funding mechanisms. Grant-funded activities may be included in an RDTI claim. However, expenditure funded by a grant and included in an RDTI claim will be subject to a clawback. 

Eligible expenditure varies by grant program; we therefore recommend that manufacturers engage with an R&D specialist early if exploring both the RDTI and grant funding. It may be possible to preferentially direct grant funds towards costs ineligible for the RDTI, thus maximising funding benefits across programs. 

How can RSM’s R&D Tax and Government Incentives team assist? 

RSM has a wide range of STEM, legal and corporate tax R&D specialists with extensive experience in preparing RDTI submissions for companies across a diverse range of manufacturing subsectors. We can assist in navigating the relevant legislative provisions and publicly released guidance from the ATO and DISR in preparing and lodging a timely and robust RDTI application. 

If you would like an assessment of whether your activities are likely to satisfy the requirements for an RDTI claim or would like to discuss assistance with preparing an application, please do reach out to RSM’s R&D Tax and Government Incentives team for an initial discussion.