Changes to the R&D Tax Incentive
The Budget includes a range of changes to the R&D Tax Incentive which will take effect from 1 July 2018.
Changes affecting SMEs and startups
For companies with turnover below $20 million, the R&D offset will be a premium of 13.5% above its corporate tax rate. Currently, such companies receive a flat 43.5% incentive. The new rules will link the R&D incentive rate with the company’s tax rate, which, if proposed legislation is passed, could be 30% or 27.5% depending on its characteristics. Accordingly, some companies could see a reduction in the R&D tax incentive from 43.5% to 41% of eligible expenditure. Also, perversely, this could see some pre-revenue companies receive a lower R&D incentive than a similar company deriving “passive” income. We anticipate there will be calls for this anomaly to be addressed before legislation is passed.
Cash refunds from the refundable R&D tax offset will be capped at $4 million p.a. (except clinical trials). Any unrefunded amount will be carried forward as a non-refundable tax offset. Whilst this represents a tightening of the R&D tax incentive, this will not impact on the vast majority of SMEs and tech startups.
Enforcement & integrity measures
These measures will include:
- Greater funding will be allocated to enforcement activity by the Tax Office and AusIndustry
- More effective, binding guidance will be released outlining the scope of what is “eligible R&D”
- R&D claimant details will be publicly disclosed, along with the amount of R&D expenditure claimed
- Anti-avoidance rules in the tax law will be strengthened
Changes affecting large businesses
Currently, companies with an annual turnover of $20 million or more are entitled to a non-refundable tax offset of 38.5% of eligible R&D expenditure.
The proposed measures will introduce an “R&D intensity percentage” to calculate the tax offset as a proportion of the company’s R&D expenditure to total expenditure.
Depending on the company’s corporate tax rate (27.5% or 30% respectively), the R&D tax offset is proposed to be:
- 31.5% or 34% offset for R&D expenditure between 0% to 2% R&D intensity (i.e. where expenditure on R&D as a proportion of total expenditure is between 0% and 2%)
- 34% or 36.5% offset for R&D expenditure between 2% to 5% R&D intensity
- 36.5% or 39% offset for R&D expenditure between 5% to 10% R&D intensity
- 40% or 42.5% offset for R&D expenditure above 10% R&D intensity
Companies with R&D activities making up a greater portion of their overall business are more likely to benefit from these measures – this will be good news for some.
Further, the maximum amount of eligible R&D expenditure that can be claimed under the scheme is proposed to increase from $100 million to $150 million per annum – this will be welcomed by large claimants.
