In Australia’s fast evolving and competitive economy, innovation is crucial in order to obtain a more circular economy, especially in the manufacturing sector. However, many manufacturers aren’t aware that their efforts to improve or create new products, systems, or processes could qualify for significant financial support through the R&D Tax Incentive.
What is the R&D Tax Incentive?
The Research and Development (R&D) Tax Incentive, administered by the Department of Industry, Science and Resources (DISR on behalf of IISA) and the Australian Taxation Office (ATO), is a government program designed to encourage innovation in Australia by offering tax offsets for eligible R&D activities. The program provides:
- A 43.5% refundable tax offset for eligible companies with an aggregated turnover of less than $20 million.
- A 38.5% non-refundable offset for eligible companies with higher turnovers, with a premium rate that increases based on R&D intensity.
For a quick overview of the R&D Tax Incentive read our guide.
Why It Matters for Manufacturers
The manufacturing industry is uniquely positioned to benefit, as many everyday improvements such as refining a production process, developing a new composite material, or customising automation software may be classified as eligible R&D Activities.
Common examples include:
- Prototyping new products or components
- Experimenting with alternative materials
- Developing new assembly line techniques
- Integrating new robotics or automation systems
- Solving technical problems where outcomes are uncertain
These are not just for “big tech”, but innovations of real, practical challenges solved in the workshop or production floors.
R&D Scenario Example 1
Company A identified a market opportunity to develop a compact, autonomous mobile robot (AMR) capable of navigating narrow warehouse aisles and automatically stacking cartons on varying shelf heights, a challenge for traditional AMRs.
Off-the-shelf robotic arms lacked precision, speed, and size. There was no commercially available solution that met the price and performance targets, meaning Company A would need to design and test its own custom system, a process full of technical uncertainties.
The project ran over 6 months and involved:
- Developing a new hybrid navigation system combining LIDAR, ultrasonic sensors, and visual SLAM
- Prototyping a lightweight, low-profile robotic arm with a custom gripping mechanism
Eligible R&D Activities
Core R&D Activities:
- Experimenting with new sensor configurations and calibration methods
- Systematically testing and refining gripping mechanisms and motor control software
- Developing novel algorithms to adapt to dynamic warehouse layouts
Supporting Activities
- Design and fabrication of test rigs and robot chassis
- Debugging software directly linked to core experiments
- Technician and engineer time spent documenting outcomes, analysis, and prototype modifications
R&D Tax Incentive Outcome
Company A engaged an R&D consultant like Fullstack to prepare their claim and successfully identified $135,000 in eligible R&D expenditure.
As a small company with turnover under $20 million, they qualified for the 43.5% refundable tax offset, receiving a cash refund of $58,725.
This refund was reinvested into new sensors and hiring a part-time software engineer.
R&D Scenario Example 2
Company B identified a market opportunity to redevelop their existing commercial garage door controller to connect and be controlled with their existing domestic cloud based application.
As the existing controller consisted of their legacy electronic circuit design and proprietary functional code, an off-the-shelf or commercially available solution was not available. This meant Company B would need to design and test its own custom solution, a process full of technical uncertainties due to power management and radio interference requirements.
The project ran over 2 years and involved:
- Outsourced development of the firmware across multiple on-board microprocessors
- Outsourced redesign of the existing circuitry to include the radio and WiFi communication circuits
- Prototyping the new control circuit board and firmware to legislated standards for a commercial electrical device
- Functional and cycle testing the prototype controllers with physical commercial garage doors
- Project management and review of the design and development
Eligible R&D Activities
Core R&D Activities:
- Development of new firmware algorithms for communication and control
- Design and testing of the control electrical circuit and power architecture
Supporting Activities:
- Design and fabrication of test rigs
- Updates to the existing app interface to include the new controller UX/UI
- Project management of the eligible R&D core activities
Excluded Activities
Activities that did not qualify under the program’s eligibility criteria included:
- Regulatory approval to Australian Standards for Electrical Appliances and radio emissions
- Assessment of the business case and commercial viability
- Marketing efforts to promote the new functionality
- Travel overseas to assess the manufacture of the prototype
R&D Tax Incentive Outcome
Company B engaged an R&D advisor to assist with their claim and, while the project was not yet completed, successfully identified $535,000 in eligible R&D expenditure for the financial year. This amount was substantiated through internally tracked timesheet allocations, contractor invoices detailing the specific R&D activities performed, and costs associated with the development of prototypes and testing rigs.
With an annual turnover over of $18.6 million, they qualified for the full 43.5% refundable tax offset, receiving a cash refund of $232,725.
With an annual turnover over of $18.6 million, they qualified for the full 43.5% refundable tax offset, receiving a cash refund of $232,725.
Key Eligibility Criteria for R&D and Manufacturing
To assess if your company is conducting eligible R&D activities, your R&D activities must meet the following criteria:
- Be experimental in nature and follow a systematic progression of work.
- Aim to generate new knowledge (e.g., new or improved products or processes).
- Involve uncertainty, where the outcome could not be known in advance.
- Be conducted in Australia (some limited overseas activity may qualify).
A formal registration must be lodged with DISR within 10 months after the end of your company’s income year. If you believe your company is eligible for the R&D Tax Incentive, book some time in with our team.
Why Act Now?
As manufacturers face increasing pressure to stay competitive, especially amid rising input costs and critical global supply chain disruptions, leveraging the R&D Tax Incentive can provide cash flow and reinvestment capital.
While this all sounds amazing, the R&D Tax Incentive program has strict record keeping and compliance requirements. Therefore, working with experienced R&D Tax Advisors is essential as they understand both technical and legislative nuances.
How our R&D Consultants help Manufacturers
At Fullstack Advisory, we help manufacturers:
- Identify eligible R&D activities
- Prepare robust documentation and substantiation
- Lodge compliant claims with DISR and the ATO
- Minimise risk and maximise benefit
We’ve helped clients in manufacturing unlock substantial R&D refunds, many of whom didn’t realise they qualified. Reach out to us today, and get in touch with one of our R&D Tax Advisors for more information.
