You win a state innovation grant. Nine months later you lodge your R&D Tax Incentive claim for the same project, your accountant mentions a clawback adjustment, and the refund you had already spent in your head gets smaller.
Clawback catches a lot of Australian founders off guard, mostly because nobody raises it at the point you sign the grant agreement. It stops you collecting the full R&D benefit on dollars a government agency already paid for, which makes it a correction rather than a penalty.
What clawback actually does
Two things happen when a grant and an R&D claim overlap. The grant pays for part of your development costs. The R&D Tax Incentive then refunds up to 43.5% of those same costs. Left alone, you would be paid twice for one dollar of spend.
Clawback fixes that by increasing your assessable income. Your grant and your R&D tax offset both land in full. You declare an extra amount as income, and the tax on that extra amount cancels the slice of R&D benefit the grant had already covered.
The ATO calls the grant a recoupment. The rules sit in Division 355 of the Income Tax Assessment Act 1997 and were rewritten for income years starting on or after 1 July 2021.
When a clawback adjustment applies
A clawback adjustment arises when you receive, or become entitled to receive, a recoupment from an Australian government agency or a state or territory body, and that recoupment relates to expenditure you are claiming under the R&D Tax Incentive.
Three parts of that wording do the work.
An Australian government agency or state or territory body is broad. Federal grants, state innovation grants, local council programs and government co-funded development arrangements all sit inside it. Money from a private accelerator, a VC or a customer does not.
Relating to the expenditure is the test, not the name on the grant. If the funding agreement requires you to spend money on the same work you are claiming as core or supporting R&D activities, the overlap counts.
Being entitled to receive it means the milestone matters, not the bank transfer. Once you have hit a milestone and the funder owes you the money, the adjustment can trigger even though the cash has not arrived.
The trigger year is where founders get stung
The adjustment is made in the year you receive or become entitled to the recoupment. That year does not have to be the year you claim the R&D offset.
Spend the money in FY25, claim the offset in FY25, then receive the grant in FY26, and the clawback adjustment lands in your FY26 return. Founders who miss this get a surprise in the following year’s tax position, long after the project has finished.
The maths, with real numbers
The ATO formula is: (starting offset minus adjusted offset minus deduction amount) divided by your corporate tax rate for the current year. That reads worse than it behaves, so work it through with numbers.
Say your company has aggregated turnover under $20 million, a corporate tax rate of 25%, and $100,000 of eligible R&D spend that a government grant paid for.
Starting offset. At 43.5%, that $100,000 of notional deductions produces $43,500 of refundable offset.
Adjusted offset. Strip the $100,000 out of your notional deductions and the offset attributable to it is nil, so the difference is $43,500.
Deduction amount. $100,000 multiplied by your 25% company tax rate is $25,000, which is the ordinary deduction you would have had anyway.
Adjustment. ($43,500 minus $25,000) divided by 0.25 gives $74,000 added to your assessable income. Tax on that $74,000 at 25% is $18,500.
So $100,000 of grant-funded R&D spend costs you $18,500 in clawback. That figure is the 18.5% premium the R&D Tax Incentive adds on top of the 25% company tax rate. You keep the value of an ordinary deduction on those dollars and you give back the bonus.
You are still better off taking the grant
Run the same $100,000 both ways.
Without the grant, you spend $100,000 of your own money, claim the offset, and get $43,500 back. The project has cost you $56,500.
With the grant, the agency pays the $100,000, you claim the offset, and you hand back $18,500 through clawback. You are $81,500 ahead of the version where you funded the work yourself.
Turning down a grant to protect an R&D claim is the wrong trade every time. The grant covers the whole dollar. Clawback only touches the premium on top.
Partial and matched funding
Most grants do not cover a full project, and clawback only bites the funded portion.
If you spend $400,000 on eligible R&D and a matched-funding grant contributes $150,000, the clawback calculation runs over that $150,000. The other $250,000 attracts the full 43.5% with no adjustment.
This is why the split between grant-funded and self-funded spend needs to be clean in your accounts from the first invoice. If you cannot show which costs the grant paid for, you are reconstructing it from memory two years later, and the ATO’s reading of an unclear split will not be the generous one.
Which funding triggers it and which does not
Government money that funds project costs triggers clawback. That covers federal project grants, state and territory innovation and commercialisation grants, co-funded development work with a government research body, council business grants, and government vouchers that pay for eligible development.
Private money does not. Equity from a VC or angel, revenue from a customer, a cheque from a privately run accelerator, a bank loan and R&D refund financing from a private lender all sit outside the recoupment rules.
The grey zone is a commercial contract with a government department. Money paid to you for delivering a product is revenue. Money paid to you to carry out development work looks closer to a grant. The contract wording decides it, so this one is worth a specific look rather than an assumption.
Is the grant taxed as well
Usually yes, and separately.
Most government business grants are assessable income in the year you receive them, unless that specific program has been declared non-assessable non-exempt income by law. That treatment is unrelated to the R&D Tax Incentive, and clawback sits on top of it.
A grant-funded project can therefore produce three separate entries: the grant as income, your R&D expenditure as notional deductions feeding the offset, and the clawback adjustment as additional assessable income. Your accountant handles the first, your R&D adviser handles the second and third, and the two of them need to be talking to each other.
The at-risk rule is a separate problem
Grants interact with an R&D claim in a second place too.
The at-risk rule can deny the notional deduction altogether. Broadly, if at the time you incurred the expenditure you could reasonably expect to be paid for it regardless of how the R&D turned out, that expenditure may not be notionally deductible at all.
Reimbursement-style funding is where this comes up. A grant that pays you back for specific invoices reads differently to a grant paid against project milestones, and the wording of the funding agreement drives the answer. Have the agreement read before you assume the spend is claimable, because the at-risk rule removes the deduction rather than adjusting for it afterwards.
What to do about it
Read the funding agreement for what it obliges you to spend money on, not only what it pays you. That clause is what links the grant to your R&D activities.
Tag grant-funded costs in Xero as they happen, at invoice level. Retrofitting the split is the expensive version.
Tell whoever prepares your R&D claim about every government dollar the project has touched, including small state programs and vouchers. They cannot adjust for funding they do not know about, and an unreported recoupment is the kind of thing that turns a clean claim into a review.
Budget the refund net of clawback. If a third of your project is grant funded, model the offset on that basis rather than discovering the gap after you have committed the money.
Put the trigger year in your forecast. A grant milestone paid in July sits in a different financial year to one paid in June, and the adjustment follows the payment.
What changes from 2028
The 2026-27 Federal Budget, handed down on 12 May 2026, announced a package of R&D Tax Incentive reforms. The core offset rate rises by 4.5 percentage points, which lifts the maximum refundable rate from 43.5% to around 48%. The refundable turnover threshold moves to $50 million, the minimum spend rises to $50,000, supporting activities come out of the eligible base, and refundability is limited to companies less than 10 years old.
None of it is law yet. The measures are proposed to start on 1 July 2028 and still have to pass Parliament. Claims for FY26 and the two years after it run on the current rules. A higher core rate would eventually make the clawback premium bigger, but nothing in your current claim changes because of the announcement.
Sorting it out
If you have taken government funding and you are not sure how it lands against your R&D claim, it is a 15 minute conversation to work out. Book a time at granton.io/meet and we will go through the funding agreement and the spend split with you. Granton works on a success fee, so there is nothing to pay unless the claim comes through.
There is more on how the program works at granton.io/rdincentive, and you can sign up at granton.io/info to get the free grants newsletter with what is currently open.
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