Quick answer: Generally not as a lump sum. Where expenditure is included in the cost of a depreciating asset, you do not notionally deduct that expenditure; instead you may notionally deduct the asset's decline in value to the extent it is used for R&D activities, worked out under ITAA 1997 ss 355-305 and 355-310 by applying Division 40 with the R&D modifications, generally by reference to the asset's effective life and the applicable decline-in-value method. When a balancing adjustment event occurs — for example, when the asset is sold or otherwise ceases to be held — the tax treatment is adjusted accordingly. Buildings are treated differently again. You self-assess.
28 July 2026 — this article describes the current rules. The 2026-27 Federal Budget announced R&DTI changes scheduled to start 1 July 2028; those are not yet law, and we cover them separately in the proposed $50,000 Budget measure.
This is the common surprise in a first equipment-heavy claim. A company spends a substantial sum on a rig, a reactor, a test cell or a pilot line, registers the R&D activities correctly, and then discovers that the amount potentially reflected in the claim for that year may be substantially less than the amount spent. Nothing has gone wrong. The R&DTI simply follows the ordinary logic of capital: you claim the asset as it is consumed by the research, not when the invoice is paid.
Getting this right is mostly a matter of knowing which of three buckets each dollar falls into before you commit to it.
Three Buckets, Decided by What the Money Bought
1. Expenditure on R&D activities
Ordinary revenue expenditure incurred on registered R&D activities — salaries, consumables, contractor fees, and services such as compute — may be notionally deductible in the year it is incurred, subject to the R&DTI expenditure rules and the specific exclusions (ATO). That is the familiar bucket; that is where cloud-compute or rented GPU-capacity charges may sit, because those arrangements generally involve acquiring services rather than ownership of the underlying hardware. We treat that case separately in our Insights.
2. Expenditure in the cost of a depreciating asset
Where the expenditure is included in the cost of a depreciating asset, it is not notionally deducted as R&D expenditure. Instead, an R&D entity may be entitled to a notional deduction for the decline in value of a depreciating asset used for R&D activities during the income year.
The ATO explains the mechanism this way: the decline in value for depreciating assets used in carrying on R&D activities is worked out under sections 355-305 and 355-310 of the Income Tax Assessment Act 1997, which require the amount allowable for the period of R&D use to be calculated notionally under the rules in Division 40, applied with certain modifications (ATO). The decline in value is worked out under Division 40 as modified for R&D purposes, including the applicable start time, effective life and decline-in-value method.
Only the R&D use counts: An asset used partly for research and partly for production gives a notional deduction only to the extent of the R&D use. That extent has to be established on some reasonable basis and evidenced — machine logs, booking records, a documented usage method — not asserted at year end.
Timing changes the cashflow case entirely: A company modelling an offset against a large capital outlay in year one is usually modelling the wrong thing. Whether the offset is refundable — and therefore a cash item — is a separate question again, covered in refundable vs non-refundable offset.
3. Buildings
Expenditure to acquire or construct a building — or part of one, or an extension, alteration or improvement to one — sits outside R&D expenditure in the ordinary way, and the ATO lists it among the amounts you cannot notionally deduct (ATO). Other provisions of the tax law may apply to that expenditure; it is simply not this concession's business. For a company planning a laboratory, a clean room or a pilot facility, the boundary between the building and the plant installed in it is worth settling with your adviser before contracts are signed rather than after.
The Balancing Adjustment: The Part People Forget
Decline-in-value deductions are estimates. They are based on an effective life chosen in advance, and research assets have an inconvenient habit of being scrapped early, sold to a partner, or repurposed into production the moment they work.
So when the asset stops being held there is a balancing adjustment event. The ATO describes it as comparing the economic value of the asset at that time — its termination value — with its written-down tax value, or adjustable value. The adjustment "ensures your final income tax position reflects the actual decline in value of the assets over time, rather than the estimates on which your decline in value deductions were based" (ATO).
For assets that have attracted R&D notional deductions, specific balancing-adjustment rules apply. Depending on the termination value, adjustable value and the asset's R&D use, a balancing adjustment event may result in an assessable balancing adjustment and related clawback consequences, or a deductible balancing adjustment or catch-up deduction. The practical points are the ones to carry:
Disposal: A disposal can trigger balancing-adjustment consequences for an asset that has been used for R&D. Selling the rig to a joint-venture partner, or to the customer whose problem it solved, has an R&D consequence.
Change of use: Moving an asset from research into production changes the R&D-use fraction, prospectively, and should be recorded when it happens.
Scrapping: Scrapping or permanently ceasing to use an asset may also trigger a balancing adjustment event. Where an experiment ends with the equipment written off, that is precisely what the balancing adjustment exists to reflect.
Asset register discipline: Keep an asset register that carries, for each R&D asset, the date first used for R&D activities, the basis of the R&D-use fraction, and the date and manner of any disposal or change of use. Reconstructing it three years later, from a fixed-asset schedule that never knew about the research, is where the cost lands.
Prototypes: It Depends What the Prototype Is For
"Can I claim the prototype?" has no single answer, because a prototype can represent different things in R&DTI terms, and the treatment follows its character and use rather than the label attached to it.
The prototype is…
Typical treatment shape
Goods or materials consumed or transformed during the experiment
Expenditure may be R&D expenditure, subject to the ordinary expenditure and feedstock rules
A depreciating asset the company holds and uses for the R&D
Notional deduction generally via decline in value, with balancing-adjustment rules applying later
Produces a tangible output that is sold or applied to the company's own use
Feedstock rules may apply where the statutory conditions are met
Where R&D activities transform or process feedstock inputs to produce tangible outputs that are later supplied to someone else or applied to the company's own use, the feedstock rules may apply. The feedstock adjustment amount is generally determined by reference to the lesser of the relevant feedstock revenue and the qualifying notional deductions attributable to producing the output. We work through the mechanics in a dedicated article in our Insights.
There is also a design point buried here. A rig built to be reused across a research programme, and a one-off article built to be delivered, are different assets with different consequences — and which one you have is often still an open decision at the point the engineering starts.
A Worked Shape
Illustrative only — a hypothetical, not a ruling, and deliberately without figures, because the numbers turn entirely on effective life, timing and use.
A company builds a test cell to run an experimental programme over two years. It commissions the cell in March, uses it exclusively for registered R&D activities in the first year, then splits it roughly evenly between research and short-run production in the second, before selling it to a supplier in the third.
Year 1: No notional deduction for the construction cost as such. A notional deduction for the decline in value for the part-year of R&D use, worked out under the R&D rules applying Division 40 as modified.
Year 2: Decline in value again, but only to the extent of the R&D use — so the documented basis for that split becomes the load-bearing record.
Year 3: The sale is a balancing adjustment event. The termination value is compared with the asset's adjustable value, with the R&D balancing-adjustment rules then applying to the relevant amount.
Three years, three different mechanics, one asset. This is why both the original asset records and the subsequent R&D-use and disposal records matter.
What to Do Before You Buy
Categorise early: Ask which bucket each line falls into — expenditure on activities, cost of a depreciating asset, or building — before the purchase order, not at registration.
Set up usage measurement: Establish the R&D-use measurement method from the outset and retain contemporaneous usage records where practicable.
Record the intended disposal path: Sale, scrap, transfer to production or transfer to a partner all have consequences.
Separate buildings from plant: Separate the building from the plant in the contract and the ledger.
Consult your tax adviser: Talk to your tax adviser about interaction with other capital rules. The R&DTI is one regime among several that touch the same asset, and the choice is not always free.
An RSP does not determine the tax treatment of depreciating assets or balancing adjustments — those matters should be addressed with your registered tax agent. An RSP may assist with experimental design, technical R&D work and supporting records within its registered RSP scope, including technical records that describe how equipment is used in conducting the R&D activities.
There is also a threshold point worth knowing if your programme is small in cash terms even though it is capital-heavy. R&D expenditure for the income year must generally be at least $20,000 — that is the lower bound of the entitlement in s 355-100(1) of the ITAA 1997 (ATO), and RSP-conducted eligible R&D activities can be claimed even where the usual $20,000 R&D expenditure threshold is not met. Precisely: where total notional deductions fall below A$20,000, the offset base is generally limited to qualifying expenditure incurred to a non-associate Research Service Provider for services in a field for which it is registered, together with eligible CRC Program contributions — the substituted base set out in the table in s 355-100(2) — other in-house amounts do not automatically join that base. See claiming R&D under $20,000. Using an RSP does not guarantee eligibility — you still self-assess.
What the 2026-27 Budget Announced
The 2026–27 Federal Budget announced proposed R&DTI reforms for income years starting on or after 1 July 2028. The measures are not yet law. Until any amendments take effect, current-year R&DTI claims continue to be assessed under the existing rules. See our Budget update for further details on the proposed changes and their status.
Frequently Asked Questions
Q: Can I claim equipment I bought for R&D under the R&D Tax Incentive?
A: Generally not as a deduction for the purchase price. Where the expenditure is included in the cost of a depreciating asset, you may instead be entitled to a notional deduction for the asset's decline in value to the extent it is used for R&D activities, worked out under ss 355-305 and 355-310 of the ITAA 1997 by applying Division 40 with modifications, over the asset's effective life. You self-assess.
Q: Do I claim the purchase price or the depreciation?
A: Generally, the relevant R&DTI amount is the asset's decline in value attributable to its R&D use, rather than a notional deduction for the purchase price itself. That is why a large capital outlay in year one usually produces a much smaller notional deduction in year one than companies expect, and why the R&D-use fraction needs a documented basis.
Q: What happens when I sell or scrap an asset used for R&D?
A: A balancing adjustment event occurs, comparing the asset's termination value with its adjustable value, so the final position reflects the actual decline in value rather than the effective-life estimate. For an asset that has attracted R&D notional deductions, the event may result in an assessable balancing adjustment and related clawback consequences, or a deductible balancing adjustment or catch-up deduction, depending on the circumstances.
Q: Is a pilot plant or laboratory building claimable?
A: Expenditure to acquire or construct a building, or an extension, alteration or improvement to one, is among the amounts the ATO lists as not notionally deductible under the R&DTI. Plant and equipment installed in the building is assessed separately on the depreciating-asset rules, so the split between building and plant is worth settling before contracts are signed.
Sources & Further Reading
ATO — Eligibility for the R&D tax incentive — the $20,000 lower bound (s 355-100(1)) and the substituted RSP/CRC base (s 355-100(2))
ATO — Tax Reform: better targeting the R&D Tax Incentive — the announced 1 July 2028 measures and their status
legislation.gov.au — Income Tax Assessment Act 1997 — Div 355, incl. ss 355-305, 355-310; Div 40
Related: R&D by industry · what does not qualify · refundable vs non-refundable offset · what an RSP is
Talk to Ignition Research before you commission the next rig — as a Registered Research Service Provider in Adelaide, we help capital-intensive R&D programmes define the experiment the equipment serves and evidence the R&D use from commissioning, so the asset register supports the claim instead of contradicting it. We are not a registered tax agent: your company self-assesses and remains responsible for its own claim, with advice and lodgement handled by your tax adviser. Get in touch.
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 depends on your circumstances and you should self-assess and seek your own advice.
Thinking about a project like this?
If you're weighing up an AI, software or technical improvement project and can't tell yet whether it's implementation or research, start with a quick read on where it sits.