Can retailers claim R&D tax incentives for AI investments?
Can retailers claim R&D tax incentives for AI investments?
Artificial intelligence (AI) is rapidly changing the retail landscape, offering new ways to personalise customer journeys, manage inventory and optimise pricing. For Australian retailers and ecommerce brands, investing in AI and other innovative solutions continues to deliver a competitive advantage. For example, many are experimenting with AI-powered smart store experiences and using AI to track trends, however, the tax implications of these investments are not always well understood. Understanding how to access research and development (R&D) tax incentives remains a key method to unlock value, support innovation and manage risk.
Understanding the R&D tax incentive
The Australian Government supports business innovation through a range of tax incentives designed to drive R&D. The centrepiece is the R&D Tax Incentive, which offers eligible businesses a refundable or non-refundable tax offset for certain expenditure on R&D activities. For retailers investing in experimental solutions, this can mean a substantial cash boost or a reduction in tax payable.
The incentive provides two core benefits:
- For companies with an aggregated turnover less than $20 million, a refundable R&D tax offset is available at the company tax rate plus an 18.5 per cent premium
- For companies with an aggregated turnover of $20 million or more, a non-refundable R&D tax offset is available, with a premium based on the intensity of R&D expenditure as a proportion of total expenditure. Any R&D expenditure above the 2 per cent intensity threshold attracts a tax offset of the company tax rate plus 16.5 per cent, while any R&D expenditure under the 2 per cent threshold attracts a tax offset of the company tax rate plus 8.5 per cent.
What qualifies as R&D
To claim the R&D tax offset, a company must be undertaking at least one core R&D activity. A core R&D activity is an experimental activity involving a systematic progression of work based on the principles of an established science where the outcome cannot be known or determined in advance and is conducted for the purpose of generating new knowledge. Other activities that directly support core R&D activities may also be eligible.
For retail and e-commerce brands, eligible R&D often includes new product development or the creation of new software solutions. For example, developing new predictive machine learning models to recommend relevant products or building AI-driven virtual store assistants to answer complex customer queries may potentially qualify.
But be careful - there are exclusions. In particular, software developed for the dominant purpose of internal business administration, such as payroll, accounting or standard ordering systems, is generally not eligible.
Common pitfalls and how to avoid them
While the R&D incentive offers significant benefits, there are important risks to manage:
- Poor documentation: Failing to keep detailed records of R&D activities and expenditure can lead to claims being denied or challenged
- Structuring: Only companies are eligible for the benefit, not trusts or individuals
- The ‘for’ test: R&D activities must be undertaken to a significant extent for the R&D entity, which weighs up which entity owns the resulting intellectual property, controls the direction of the R&D activity, and bears the financial risk
- Payments to associates: Costs paid to associates must actually be paid, not just incurred
- Overseas activities: R&D conducted offshore is generally ineligible unless covered by an approved overseas finding
- Aggregate turnover: This includes the turnover of the R&D entity and any connected or affiliated entities, which can affect eligibility.
Engaging advisers early in the process can help ensure activities are structured appropriately and that documentation requirements are met from the outset, reducing the risk of denied claims.
How BDO can help
AI and R&D are transforming retail, but navigating the tax landscape requires careful planning and documentation. Our retail specialists have extensive experience helping retailers access the R&D Tax Incentive and manage compliance.
The registration deadline of 30 April 2026 for the year ended 30 June 2025 is fast approaching. Find out more about our retail services to explore how we can help your business.
