R&D tax incentive overhaul
In simple terms, the Research and Development (R&D) tax incentive provides a tax offset to eligible companies that conduct certain R&D activities that are likely to benefit Australia’s wider economy. As a response to various reviews which indicated that the incentive was not meeting its policy objective, the government has introduced draft legislation to overhaul the incentive to better target the program and ensure its integrity.
The tax offset is available to eligible companies that conduct eligible R&D activities which are classified as experimental activities that are conducted in a scientific way for the purpose of generating new knowledge of information.
Since its implementation, successive governments have undertaken reviews into the effectiveness of the incentive. The 2016 Review of the R&D Tax Incentive and 2018 Innovation and Science Australia 2030 Strategic plan found the R&D tax incentive did not fully meet its policy objectives of inducing business research and development expenditure beyond “business as usual” activities”.
As a response to the reports, the government announced in the 2018 Budget that it will be overhauling the R&D tax incentive to better target the program and ensure its integrity. In short, in draft legislation released, the government has proposed an introduction of an “R&D premium”, which is the rate of the non-refundable offset plus the applicable company tax rate. The premium will depend on the aggregated annual turnover of the company as well as the R&D “intensity” in some cases.
For companies with an aggregated annual turnover of $20m or more, the R&D premium will be based on R&D intensity, calculated as a proportion of eligible R&D expenditure (up to $150m) and total expenditure (which will be based on the tax returns of the company applying for the incentive). The company will be entitled to differing percentage points of the non-refundable offset based on the intensity of the R&D activity varying from 4 percentage points for 0% to 2% intensity, to 12.5 percentage points for intensity above 10%.
For companies with aggregated annual turnover below $20m, the refundable R&D offset will be a premium of 13.5 percentage points above the applicable company tax rate. However, cash refunds from the refundable R&D tax offset will be capped at $4m per year and those amounts that cannot be refunded can be carried forward as a non-refundable tax offset to use in future income years. It has also been proposed that clinical trials will be exempted from the $4m refund cap, provided it satisfies the Therapeutic Goods Administration definition of a clinical trial.
The proposed overhaul has been met with a subdued response from various industry groups, particularly in the technology and digital space which see the proposed changes as potentially being limiting. There is concern that start-ups that incur high R&D costs prior to earning significant income may be worse off as the refund cap could reduce their cash flow at a time when they need it the most.
Does your company claim R&D?
If your company is not currently claiming the R & D Tax Incentive and would like to know if it is eligible, or if your company claims the R&D tax offset currently and you would like to know how the changes may affect you, please contact your usual Hanrick Curran advisor or alternatively Tax Partner, Jamie Towers on 07 3218 3900.
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.