Combining Grants and R&D Tax: Can you Stack Government Funding Without Getting Burned?
Author: Matthew McLean
Australian innovators have a raft of government funding options available to them at a given time - some that are competitive, and some to which they’re entitled. Between the R&D Tax Incentive (RDTI), the Industry Growth Program (IGP), the Medical Research Future Fund (MRFF), ARENA and state-level grants, the landscape of opportunities is rich. As a result, we often get asked whether and how you can access multiple programs simultaneously.
The rules around how programs interact can be complex and getting it wrong can trigger repayment obligations and ATO scrutiny. This guide gives you an insight into how we think about stacking government funding strategically, and where the traps can be.
What we mean by ‘stacking’
Stacking is the use of more than one government support program for the same or related activities. Where multiple sources of non-dilutive funding are available, the key issue is how those programs interact.
Most commonly, this arises where a company has secured a competitive state or federal grant and is assessing how this interacts with the RDTI.
RDTI and Grants: Clawback of recoupment amounts
Where you receive a government grant or reimbursement for expenditure on which you have also claimed the RDTI, a clawback adjustment applies under the Income Tax Assessment Act 1997. Critically, the clawback doesn't reduce your tax offset or the grant directly. Instead, an additional amount is included in your assessable income in the year you receive the grant. The amount included is calculated to effectively recover the incentive component of the R&D tax offset that related to the recouped expenditure.
For many early-stage companies with significant accumulated tax losses, this additional assessable income may be absorbed by those losses rather than generating an immediate cash tax liability. In that scenario the company retains the full refundable offset, but loses some carry-forward tax loss balance, which has real future value even if it has no immediate cash impact.
Which combinations tend to work well
In light of the clawback rules, the cleanest RDTI-grant stacks are those where the grant and the RDTI are funding fundamentally different types of activity, meaning there is little or no overlap. Some categories that tend to work well in practice include:
Grants that fund commercialisation activity at the market entry stage. Where a program requires a product to already exist and funds activities needed to take it to market such as customer acquisition, sales and marketing, buyer demonstrations and market development, those activities generally don't overlap with RDTI-eligible experimental work. Queensland's Ignite Ideas Fund is a good example. In most cases, Ignite Ideas and the RDTI are funding genuinely different phases of a company's development and can be pursued together cleanly. The practical requirement is that the scoping of activities between the two programs is clearly documented.
Grants that fund expenditure explicitly excluded from the RDTI such as the acquisition of tangible depreciating assets or building expenditure. This does require more care. Where a grant covers the cost of equipment or infrastructure that is subsequently used in eligible R&D activities, the interaction with the RDTI depends on how the asset is treated. The RDTI allows notional deductions for the decline in value of assets used in R&D, but the clawback can still apply to the extent a grant has reimbursed the original cost of acquiring those assets. This is an area where advice is worth getting early.
Export-focused grants like the Export Market Development Grant fund international marketing and export promotion activity, which is almost never RDTI-eligible. In our experience EMDG and the RDTI can generally be pursued together without concern about the clawback.
CRC Program grants are another notable exception. Despite funding collaborative R&D activity that would ordinarily overlap with RDTI-eligible work, recoupments received under the CRC Program are specifically exempt from the clawback adjustment under the ITAA 1997. This means CRC-P and the RDTI can be accessed together without a clawback income inclusion arising. It is worth noting that the at-risk rules still apply to the RDTI claim in the usual way.
Where things get more complex
Grants that fund research and earlier-stage development such as feasibility studies, proof-of-concept work or prototyping often sit in the same space as RDTI-eligible experimental activity, and this is where the clawback is most likely to apply in a material way.
For example, the IGP covers projects at the feasibility, proof-of-concept and prototyping stages. MRFF grants fund health and medical research that typically overlaps substantially with RDTI-eligible activity. In these cases, the clawback will typically arise, and the question is whether the net position after accounting for the clawback income inclusion and any tax loss interaction, is still positive. In our experience it usually is, but the answer depends on the specific numbers and should be worked through before you apply rather than after.
Stacking grants with grants: federal and state co-funding
Whether other government grants can count toward a matched funding requirement depends entirely on the individual program's rules. Many federal commercialisation programs are explicit that the co-contribution must be genuine private expenditure. For example, the IGP requires the matched funding to come from the applicant and prohibits using other government grants to fund your share.
However, some programs are specifically designed with federal-state co-investment in mind. The Queensland Sovereign Industry Development Fund is a good example. Its guidelines explicitly require applicants to detail any Commonwealth Government contributions as part of their project financing, specifically contemplating federal grants sitting alongside SIDF funding as part of the co-contribution package.
Some programs go further still and are explicitly designed to supply the co-contribution needed to access federal grants. The WA Future Health Research andInnovation Fund's Major Research and Innovation Application Support Program (MRIAS) is the clearest example. It provides in-principle cash commitments of up to $1 million specifically to support WA researchers and organisations applying to competitive federal programs including the MRFF NCRI, MRFF Clinical Trials Activity Initiative, NHMRC Partnerships Projects, and CRC-P grants. The co-contribution requirements of major federal health research programs are the explicit problem this program is designed to solve.
Grant income and the $20 million RDTI threshold
Grants are generally assessable as ordinary income and will be included in a company's aggregated turnover for the purposes of the RDTI. This matters because the $20 million aggregated turnover threshold determines whether a company accesses the 43.5% refundable offset.
For companies operating near that threshold, a material grant received in a given income year could push aggregated turnover over $20 million and result in the loss of the refundable offset for that year. Given the refundable offset can represent a significant cash return for early-stage companies, this is a consequence worth modelling before a large grant is accepted rather than after.
The timing of income recognition and how the grant is characterised also affects which income year the turnover impact falls - another reason to ensure your R&D tax advisor is part of the conversation early in the grant process, not just at year end.
A practical checklist
Before combining programs, it's worth working through a few questions:
Does the grant fund activity that overlaps with your RDTI-eligible R&D program?
If so, what is the dollar value of the overlap and what does it cost you in lost offset? Is the net position still positive?
Can the grant scope be structured to minimise RDTI-eligible expenditure in the funded activities?
Do you have project-level accounting in place to track grant-funded versus company-funded expenditure separately?
Has your R&D tax advisor been briefed on all grants received or applied for in the current year?
Have you modelled the impact of grant income on your aggregated turnover, and confirmed you will remain below the $20 million threshold in the year the grant is received?
Talk to our team
Getting the most out of Australia's government funding landscape is as much about sequencing and structure as it is about knowing which programs exist. If you're managing multiple funding sources and want to make sure your position is right across the board, we'd be happy to work through your funding stack with you. Talk to the Intellect Labs team.