What Counts as Eligible R&D Spend in Australia

By Alex Knight, Founder and CEO, Advanced

The founders who get the most from the R&D Tax Incentive are rarely the ones with the most sophisticated R&D programs. They're the ones who understand what the program actually counts as eligible spend, and they claim all of it.

Most founders leave money on the table. Not because their activities don't qualify, but because nobody told them the full list.

This is that list.

How the RDTI categorises eligible activity

The R&D Tax Incentive divides eligible activities into two categories: core R&D activities and supporting R&D activities. You need at least one core R&D activity to claim the program. Supporting activities are eligible because they directly support a core activity.

Core R&D activities are experimental activities whose outcome cannot be known in advance. The key test is genuine technical uncertainty. You are not sure if what you are trying to do is actually possible, and the only way to find out is to try. The work must proceed from hypothesis to experiment, observation, and evaluation.

Supporting R&D activities are activities that directly support a core R&D activity. These can include production of goods or services, provided the dominant purpose is supporting the core experimental work rather than generating revenue.

The practical implication: a wider range of activity qualifies than most founders assume, particularly around supporting activities. The work doesn't have to look like science.

What counts as eligible R&D expenditure

Staff salaries and wages

Time spent by employees on eligible R&D activities is claimable. This includes developers, engineers, researchers, data scientists, and any other staff whose time is spent on experimental work.

The key requirement is apportionment. If a developer spends 60% of their time on eligible R&D and 40% on BAU maintenance, 60% of their salary is eligible expenditure. Most founders either don't track this at all or apply a blanket percentage without documentation. The ATO expects time records that support whatever apportionment method you use.

This is typically the largest component of an R&D claim for a software or technology business. It's also the most commonly underclaimed because founders assume only dedicated R&D staff qualify.

Contractor and consultant fees

External contractors engaged to support eligible R&D activities can be included. This includes technical consultants, specialist engineers, UX researchers conducting user studies that feed into experimental work, and any other external provider whose work directly supports core R&D.

The contractor must be engaged by you and the expenditure must be at risk, meaning you bear the cost regardless of outcome. Expenditure on contractors that is guaranteed to be recouped does not qualify.

Prototype and materials costs

Physical materials consumed or transformed in the course of experimental work are eligible. This includes components used to build prototypes, raw materials used in testing, consumables used in laboratory or manufacturing trials, and tooling or moulds produced specifically for R&D purposes.

Materials that are incorporated into a finished product for sale are generally not eligible unless the experimental work they're part of is core R&D.

Cloud computing and software costs

This is the category most commonly missed by software and technology founders.

Cloud infrastructure costs, AWS, Google Cloud, Microsoft Azure, and equivalent services, are eligible where the compute is directly used to run experimental workloads. If you're running experiments, training models, or testing hypotheses on cloud infrastructure, the associated costs are supporting R&D expenditure.

Software subscriptions, development tools, and similar costs that are directly used in eligible R&D activities can also be included. General business software does not qualify.

IP and patent search costs

Investigating the prior art landscape as part of assessing whether a technical approach is novel is part of the systematic investigation the RDTI rewards. Patent search costs, prior art reviews, and similar investigative work conducted in support of core R&D activities can be included.

Travel costs for R&D purposes

Travel that is directly related to eligible R&D activity can be claimable. This includes travel to field trial sites, travel to access specialist equipment or facilities not available in Australia, and travel to academic or technical partners involved in the R&D work.

General conference attendance, networking, and business development travel does not qualify.

Failed experiments

This is the one that most surprises founders.

The R&D Tax Incentive is specifically designed to support genuine experimental work. If an experiment fails, if the outcome was that the approach doesn't work, that is not a problem for your claim. It's evidence that the work involved genuine technical uncertainty. The expenditure on that experiment is eligible.

Founders who write off failed project costs as unclaimable are leaving money on the table. The program rewards the attempt, not only the success.

What does not count as eligible R&D expenditure

Routine or business-as-usual development: Bug fixes, maintenance updates, minor enhancements, and standard configuration of existing software do not qualify. Fixing a known bug using known techniques is not experimental.

Market research: Research into customer preferences, market sizing, and competitive analysis is not R&D under the RDTI. The program covers technical uncertainty, not commercial uncertainty.

Quality assurance and testing of finished products: Testing that confirms a finished product meets specifications is not eligible. Testing as part of an experimental process can be.

Pre-production and commercialisation costs: Activities focused on getting a product to market, including marketing, sales, distribution, and administration, do not qualify.

Routine data collection: Collecting data without a defined experimental hypothesis or systematic investigative process does not meet the program's requirements.

The documentation requirement

Understanding what's eligible is half the problem. The other half is documentation.

The ATO requires contemporaneous records demonstrating that activities meet the R&D definition and that associated costs are correctly attributed. Retrospective reconstruction of records is a significant risk in an audit context.

In practice this means keeping records of experimental hypotheses before experiments begin, documenting the experimental process including what was tested, what was observed, and what conclusions were reached, maintaining time records that support the apportionment of salary costs, keeping invoices and payment records for contractor and supplier expenditure, and documenting the connection between each cost and the eligible activity it supports. The standard of documentation doesn't have to be elaborate. It needs to be accurate, timely, and capable of demonstrating the experimental nature of the work and the costs incurred.

How the refund compounds when you access it early

Understanding what's eligible determines the size of the refund. Understanding how to use the refund determines how much value you extract from it.

The RDTI pays back 43.5 cents for every dollar of eligible spend for companies with aggregated annual turnover under $20 million. For a company spending $600,000 on eligible activities, that's $261,000 in anticipated refund.

When you access that refund before the ATO processes the claim and reinvest it into eligible R&D before the financial year closes, that additional spend generates its own refundable offset. The program compounds. For a full explanation of how this works, including worked examples and an interactive calculator, see our R&D Tax Incentive capital strategy guide.