The impact of Government Grants on R&D Tax Incentive claims

Companies preparing R&D Tax Incentive claims need to be aware of rules that prevent “double-dipping” when they have received grants or other recoupments for the R&D activities being claimed. 

Clawback adjustments 

In situations where a grant is received to support the conduct of R&D activities, a “clawback adjustment” must be calculated and included as part of the R&D Tax Incentive claim for those R&D activities.  

Clawback adjustments result in additional income being recognised within a company’s income tax return. This offsets any tax benefit derived from including the R&D activities and expenses covered by the grant within the R&D Tax Incentive claim and, as a result, prevents a double benefit being received. 

Recent changes and new guidance

Importantly, the method of calculating clawback on grants and recoupments was revised in 2022. This has resulted in significant changes to how companies calculate and report their R&D tax claim and any clawback amounts.  

Despite the changes, the clawback adjustment calculations remain complex. Confusion with how the new calculations operate or using the now defunct methods for calculating clawback adjustments can easily result in too much or too little clawback being applied, and an incorrect final tax position. 

The ATO has now issued new guidance with several worked examples to assist companies to understand and accurately process these clawback adjustments. Whilst the ATO’s guidance covers multiple scenarios, the examples are simplistic and don’t cover all situations.

Key considerations when calculating grant clawback 

Provided below are some important points to consider when preparing clawback adjustment calculations: 

• Clawback occurs when the grant is received, not when the expenditure is incurred. As a result, the clawback (addition of assessable income) may well occur in a different financial year to when the R&D tax benefit is derived.

• Some grants and government payments do not require clawback, for example Cooperative Research Centre Projects (CRC-P) grants.

• A cap can apply to limit the clawback amount that needs to be recognised in scenarios where the grant funds cover non-R&D activities and expenses.

• Clawback rules apply across connected entities so you can’t avoid clawback by retaining the grant in one entity and claiming the R&D Tax Incentive in another entity.

It’s critical to ensure you consider any overlap between the grants you’ve received and the activities and costs being claimed each year as part of your R&D Tax Incentive claim. It’s also important to understand the activities and expenses that each type of government funding can cover to maximise the value you can derive from the grants and R&D tax incentives you receive. 

If you have any concerns or need support with understanding how grant clawback is applied as part of your R&D Tax Incentive claim, please reach out and an expert within our team will be happy to help.