Quick answer: A feedstock adjustment may arise where eligible feedstock inputs are transformed or processed in R&D activities and the resulting goods are subsequently supplied, applied, or otherwise disposed of. The adjustment broadly adds to assessable income an amount equal to one-third of the lesser of the feedstock input expenditure or the value of the output, under Subdivision 355-H of the ITAA 1997. The at-risk rule is separate: it reduces your notional R&D deduction up front where you're guaranteed to recover the cost regardless of the R&D outcome.
25 June 2026 — the 2026–27 Federal Budget announced R&DTI changes scheduled to start 1 July 2028; this article describes the current rules unless stated otherwise.
If your R&D happens on the factory floor — an experimental batch on the production line, a new recipe run through real plant, a trial that still produces saleable goods — there are two rules in the R&D Tax Incentive (R&DTI) that quietly reduce your benefit. They are the feedstock adjustment and the at-risk rule. They are often confused, because both claw back value, but they work in completely different ways and at different points in your claim. This article explains each in plain English, with a numeric worked example, so you can self-assess where you stand before lodgement.
As a Registered Research Service Provider (RSP000047), our role is to help you structure and substantiate eligible R&D activities. The figures and mechanics below come from the ATO's published guidance and the legislation; how they apply to your business depends on your circumstances, so treat this as general information and seek your own tax advice.
Who should care: if your R&D produces real, saleable output, these rules can quietly trim your benefit. Pay close attention if you run:
Food & beverage trials
Advanced materials
Chemical and process trials
Pilot production runs
Agricultural and biological production trials
What is a feedstock adjustment?
Feedstock is the inputs — materials, goods and energy — that are transformed or processed during your R&D activities to produce something you then supply (sell) or apply to your own use. Think of the flour, milk and energy consumed making an experimental batch of product that you still send out the door, rather than throw away.
The logic is one of fairness. The R&DTI is meant to subsidise the cost of doing R&D. If you ran experimental activities but recovered value from the output — because you sold the resulting product — Parliament's view is that you shouldn't receive the full R&D benefit on inputs you effectively got paid back for. So the rules add an amount to your assessable income, which reduces the net benefit. This is the feedstock adjustment, contained in Subdivision 355-H of the ITAA 1997 ("Feedstock adjustments").
The amount is broadly **one-third (1/3) of the lesser of**:
your feedstock input expenditure (what the consumed inputs cost), and
the feedstock output value (what the resulting product is worth, or what you sold it for).
Taking the lesser of the two protects you when a trial flops and the output is worth little. You only ever bring one-third of the smaller figure into assessable income.
A worked example
A food manufacturer runs an experimental production batch testing a new fermentation process. The eligible feedstock inputs consumed in the batch (ingredients and energy that are transformed) cost $90,000. The batch still produces saleable product, which is sold for $120,000.
Feedstock input: $90,000
Feedstock output value: $120,000
The lesser of the two: $90,000
Feedstock adjustment = 1/3 × $90,000 = $30,000
That $30,000 is added to the company's assessable income for the year. It does not cancel the R&D claim — the company still notionally deducts its eligible R&D expenditure — but the adjustment offsets part of the benefit on inputs whose value was recovered through sale. If the batch had instead sold for only $60,000, the lesser figure would be $60,000 and the adjustment would be 1/3 × $60,000 = $20,000.
A few practical notes:
Feedstock adjustments arise in the income year you supply or apply the output, which may be after the year you claimed the R&D expenditure.
Not everything in a production run is feedstock. Inputs that are merely used but not transformed (and overheads) are treated differently — the rule targets materials and energy that go into the product.
What is the at-risk rule?
The at-risk rule is separate and applies upstream, when you calculate your notional R&D deductions in the first place. The principle: you can only claim the R&D incentive to the extent your expenditure is genuinely at risk.
If, when the expenditure is incurred, the company is guaranteed to receive an amount (consideration or a recoupment) that it would not receive but for the expenditure — regardless of how the R&D turns out — then it isn't truly bearing the risk of that spend. The at-risk rule reduces the notional R&D deduction to the extent that expenditure is not genuinely at risk, including amounts that are effectively guaranteed to be recovered regardless of the R&D outcome. The ATO's guidance and Taxation Ruling TR 2021/5 explain how the Commissioner applies the test.
The key contrast:
At-risk rule — reduces the deduction up front, where you were never really exposed to the cost.
Feedstock adjustment — adds to assessable income later, where the output of your R&D had recoverable value.
A simple at-risk illustration: if a customer or grant arrangement guarantees you will be reimbursed for specific R&D spend no matter the outcome, that guaranteed reimbursement may strip those dollars out of your notional deduction, because they were never at risk. (Government recoupments and grants can also trigger a separate clawback mechanism — that's related but not the same as the at-risk reduction, and worth checking case by case.)
Feedstock vs at-risk: side by side
What it isWhen it appliesEffect on your claimTypical triggerFeedstock adjustmentBrings back part of the benefit on inputs whose value you recovered through saleLater — in the income year you supply or apply the output (may be after the claim year)Adds to assessable income — broadly one-third of the lesser of feedstock input cost or output valueYou transform materials/energy in R&D and sell or use the resulting productAt-risk ruleLimits the deduction to expenditure you genuinely bear the risk ofUp front — when you calculate notional R&D deductionsReduces the notional deduction by the guaranteed amountYou're guaranteed consideration or reimbursement for the spend, regardless of the R&D outcome
Who this hits — and how to plan
These rules bite hardest in industries where R&D and normal production overlap:
Manufacturing and processing — experimental runs on real plant that still yield sellable goods.
Food & beverage — new recipes, fermentation and shelf-life trials that produce saleable batches. See our R&D Tax Incentive for food & beverage guide.
Energy, chemicals and materials — inputs transformed during scale-up trials.
Practical steps to self-assess:
Track inputs and outputs per experimental batch. You need both the feedstock input cost and the output's value to compute the one-third-of-the-lesser figure.
Flag any guaranteed reimbursements tied to specific R&D spend before lodgement, so the at-risk position is right from the start.
Separate transformed inputs from used inputs. Only transformed/processed materials and energy are feedstock.
Confirm activity eligibility first. Routine production isn't R&D; see what does not qualify and our R&D Tax Incentive overview.
Getting this right is about accuracy, not avoidance — applying the adjustments correctly is what keeps a claim defensible.
Talk to Ignition Research before your next experimental production run — we help structure the R&D so feedstock and at-risk impacts are understood up front.
Frequently asked questions
Q: What is a feedstock adjustment? A: It's an amount added to your assessable income when R&D activities transform inputs into a product you sell or use. Broadly, it equals one-third of the lesser of the feedstock input cost or the output's value, so you don't keep the full R&D benefit on inputs whose value you recovered.
Q: When does feedstock reduce my R&D claim? A: When you consume materials or energy in R&D and the resulting product is supplied or applied to your own use. The adjustment arises in the income year you supply or apply that output, which can be after the claim year.
Q: What is the at-risk rule in the R&DTI? A: It reduces your notional R&D deduction up front where your expenditure isn't genuinely at risk — for example, where you're guaranteed to be reimbursed regardless of the R&D outcome. It's different from feedstock, which adds to income later.
Q: Do I include feedstock in my assessable income? A: Yes — a feedstock adjustment is included in assessable income (not a deduction reduction). The amount is broadly one-third of the lesser of the input cost or output value. You should self-assess this and seek your own advice.
Sources & further reading
ATO — Clawback of feedstock adjustments: Clawback of feedstock adjustments
Taxation Ruling TR 2021/5 (at-risk rule) — cited by name; search the ATO legal database for the current ruling.
Federal Register of Legislation — Income Tax Assessment Act 1997 (Subdiv 355-H, feedstock): legislation.gov.au
Related: R&D Tax Incentive for food & beverage · What does not qualify · R&D Tax Incentive overview
This article is general information from a Registered Research Service Provider about the R&D Tax Incentive. It is not tax, legal or financial advice; eligibility and tax treatment depend on your circumstances and you should self-assess and seek your own advice.
