R&D Tax Incentive: Quarterly Credits

Under the Research & Development (R&D) tax incentive, eligible companies are entitled to an R&D tax offset for expenditure on eligible R&D activities. For eligible companies with an aggregated turnover under $20 million, this is a 45 per cent refundable tax offset.

On 12 April 2013, the Government released draft legislation outlining the proposed design to provide the R&D tax incentive for eligible companies through quarterly credits. Quarterly credits will be accessible for each quarter commencing on or after 1 January 2014. Under the proposed legislation, the R&D quarterly credits system will be an opt‑in element of the R&D tax incentive available to eligible companies with an annual aggregated turnover of less than $20 million.

A company that does not meet the requirements to access quarterly credits will retain its normal entitlement to register for the R&D refundable tax offset through its end-of-year income tax return.

The R&D quarterly credits system is subject to the following eligibility requirements:

Reasonable receipt test

To opt‑in to the quarterly credits system a company must reasonably expect to receive the R&D refundable tax offset. This means a company expects to:

— Be an R&D entity

— Have aggregated annual turnover of less than $20 million

— Not be controlled by an exempt entity

— Undertake eligible R&D activities

Complying taxpayer test

As the quarterly credits system provides payments in advance of a company’s annual income tax return lodgement, such payments should only be open to companies that have complied with its taxation and lodgement obligations.

History test

In order to meet the history test, a company must have been entitled to, and have claimed, the new R&D tax incentive in at least one of the last 5 income years.

The amount of quarterly tax credits

The draft legislation outlines that the Commissioner will advise a company of a ‘standard amount’. This amount is calculated on the basis of the latest year for which a company’s income tax has been assessed. The standard amount limits the liability of repaying an excess amount at the end of the year and protects a company from any liability for the general interest charge (GIC).

For a net refund company, the standard amount for each quarter will be that net refund amount attributable to the R&D refundable tax offset, divided by four. For a tax payable company (for the most recent income year), the standard amount will be zero.The standard amount will be paid on the 28th day after the end of the quarter in which it has applied to receive quarterly credits (except for a quarter ending in December, in which case it will be paid on 28 February).

A company also has the ability to vary the standard amount making it possible for a company that had been tax payable in a previous year to receive quarterly credits for the current year, despite the Commissioner’s advised zero standard amount.

End of year reconciliation

The quarterly credits system provides payments in anticipation of a company’s refund of the R&D refundable tax offset for the current income year. As such, an end‑of‑year process is required to reconcile a company’s anticipated income tax position with its actual income tax position.

Entitlement to quarterly credits does not replace the normal process for claiming the R&D refundable tax offset.The company income tax return will also incorporate a reconciliation process for quarterly credits.

Quarterly credit amounts paid to a company in respect of the income year will be debited against its income tax assessment to determine whether it has an amount due or refundable.  Where a company (for whatever reason) is paid a total amount of quarterly credits that exceeds the refund of the R&D refundable tax offsets, it will be required to repay any excess quarterly credits received.  These payments will be due on the same day as any amount payable as a result of a company’s income tax assessment for that year.

For further details about this announcement, contact your local Tax Advisor.