On 5 December 2019, the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 was introduced to Parliament. This Bill proposes numerous changes to the R&D Tax Incentive program, some of which are tweaked from the previous Bill proposed (after changes were initially announced in the 2018 Federal Budget) that was temporarily shelved when the Coalition Government took over in August 2018. Disappointingly this revised Bill, which is to be considered by Parliament early 2020, could be a barrier for innovation in Australia and could significantly hinder the continued growth and success of some companies that rely on the R&D program for a much-needed cash-injection. If enacted, the Bill will apply to all claims from 1 July 2019.
The current proposed changes to the R&D Tax Incentive program include:
- Reducing the refundable tax offset from the flat rate of 43.5% to 13.5 percentage points above the applicable company tax rate. This means refundable R&D claims will be reduced by 2.5-5% over the next three years as the corporate rate decreases. The rate for 2019-20 will be 41%.
- Reducing the non-refundable tax offset from the flat rate of 38.5% to a R&D Premium Rate that is dependent on the R&D intensity threshold scale (comprising of three tiers), where R&D intensity is measured as eligible R&D expenses divided by total company expenses. The R&D premium rates available include 4.5% as the base rate (for R&D intensity of 0 to 4%), 8.5% (for R&D intensity of greater than 4 to 9%) and 12.5% (for R&D intensity of greater than 9%). The R&D tax offset amount is calculated by addition of the premium R&D rate amount for each relevant tier to the company’s income tax rate.
- The implementation of an annual refundable cap of $4 million, with any remaining offset amounts being treated as a non-refundable tax offset and applied to the claimant’s payable income tax. Any further excess will be carried forward for use in future income years. This could potentially allow claimants to access more of their refundable tax offset by decreasing their income tax. This cap will not apply to eligible R&D expenses incurred on clinical trials.
- A legal definition on what constitutes as ‘eligible’ clinical trials, stating:A clinical trial is a planned study of the safety or efficacy in humans of an intervention (including a medicine, vaccine, treatment, diagnostic procedure or medical device) with the aim of achieving at least one of the following:
(a) the discovery, or verification, of clinical, pharmacological or pharmacodynamic effects;
(b) the identification of adverse reactions or adverse effects;
(c) the study of absorption, distribution, metabolism or excretion.
- Increasing maximum annual expenditure from $100M to $150M. Expenditure over $150M will not receive the R&D offset premium and will be offset by the applicable company tax rate.
- Amending the anti-avoidance provisions of the Income Tax Assessment Act 1936 (ITAA 1936) to include the refundable and the non-refundable R&D tax offsets, allowing the Commissioner to apply anti-avoidance laws with respect to the R&D Tax Incentive to prevent claimants from engineering artificial arrangements to access the Incentive.
- The Commissioner of Taxation will publish information about the R&D activities of R&D companies. Publication of this information will be delayed by two years to safeguard sensitive activities.
These changes could potentially have a huge impact on companies conducting innovative R&D in Australia – namely, companies with an aggregated turnover above $20 million where a low R&D intensity score will likely receive lower benefits than in previous years, while some STEM companies that tend to make significant financial investments into R&D that do not constitute as ‘clinical trials’ will no longer be able to receive annual R&D refunds above $4 million (if their aggregated turnover is below $20M). Despite numerous review reports and expert commentary calling for innovation in Australia to be nurtured, these changes to the R&D scheme could largely decrease the benefits of companies performing legitimate R&D activities and increase the likelihood of companies off-shoring major activities.
Please contact our R&D team for a free consultation about the R&D Tax Incentive and what the proposed changes mean for your company.