New law regarding R&D incentives was introduced to the House of Representatives on 5 December 2019. If passed, the new measures will apply generally from the income year ending 30 June 2020.

The R&D incentive was introduced in 2011 to encourage R&D activities that might not otherwise be conducted in cases where the new knowledge gained is likely to benefit the wider Australian economy. Expenses and depreciation costs incurred on R&D activities can be eligible for the following tax benefits:

  • A 43.5 per cent refundable tax offset is available to most small R&D entities – those with an aggregated turnover of less than $20 million. The refundable offset can be refunded as a cash payment to an R&D entity if the offset exceeds the entity’s income tax liability; and
  •  A 38.5 per cent non-refundable tax offset is available to larger R&D entities and R&D entities controlled by one or more tax exempt entities. A non-refundable tax offset may be used to reduce an R&D entity’s income tax liability for an income year. Any remaining excess must be carried forward to be applied against income tax in future income years.

The value of the R&D incentive is generally the difference between the R&D entity’s corporate tax rate and the R&D tax offset rate (plus, if applicable, the benefit of refundability if the offset exceeds tax payable). For example, the tax benefit (reduction) of a 43.5 per cent tax offset to an R&D company paying tax at a rate of 27.5 per cent would be 16 per cent.

The proposed changes in relation to R&D incentives are as follows:

  • Increase the R&D expenditure threshold from $100 million to $150 million and make the threshold a permanent feature of the law (currently, the threshold will cease on 1 July 2024);
  • Link the R&D tax offset for refundable R&D tax offset to claimants’ corporate tax rates plus a 13.5 per cent premium i.e. don’t fix the offset rates;
  • Cap the refundability of the R&D tax offset at $4 million per year (however, offset amounts that relate to expenditure on clinical trials do not count towards the cap); and
  • Increase the targeting of the incentive to larger R&D companies with high levels of R&D intensity, reduce the benefits supplied to certain entities undertaking R&D activities and increase the benefits to others.

Other proposed changes enhance the integrity of the R&D tax incentive by ensuring that R&D companies cannot obtain inappropriate tax benefits, and by clawing back the benefit of the incentive to the extent a company has received another benefit in connection with an R&D activity.

These changes are as follows:

  • Extend the general anti-avoidance rules in the tax law to R&D tax offsets directly;
  • Make the rate at which the offset is recouped more accurate in situations where the offset would otherwise result in an additional or double benefit; and
  • Make the rate at which deductible balancing adjustment amounts incorporate the incentive more accurate.

The proposed changes will also improve the administrative framework supporting the incentive by making information about R&D expenditure claims transparent, enhancing the guidance framework to supply certainty to applicants and by streamlining the administrative process. These changes include:

  • Allowing information in relation to incentive claimants and their R&D expenditure to be published;
  • Allowing the Board of Innovation and Science Australia to issue determinations;
  • Broadening the scope of the Board’s delegation powers; and
  • Imposing a 3-month time limit on extensions of time.

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