R&D tax credits to offer higher rates of benefit to broader range of companies

MJA’s Managing Director, Kris Gale, was invited to attend a budget lock down hosted by the Minister for Innovation, Industry, Science and Research, Senator Kim Carr and the Minister for Small Business, Craig Emerson. The highlight was the announcement of a new R&D tax credit system which, along with a range of other initiatives, is a positive  response to the Cutler Report. At the same time, the government released a new white paper, Powering Ideas: An Innovation Agenda for the 21st Century (PDF).

In an overall sense this is a pro-innovation and pro-business budget

In an economic environment that has required some cuts to some government programs, balanced with appropriate stimulus activities, innovation investment has clearly been recognised  for its economic benefits.

The government has announced an R&D tax credit with two levels of assistance:

• a 45% refundable credit for companies with turnover of less than $20 million (we assume that this will be calculated on a group basis, similar to the current R&D tax offset), equivalent to a 150% tax concession; and
• a 40% non-refundable credit for companies with turnover of more than $20 million and for companies with foreign-owned intellectual property arrangements that conduct R&D in Australia. This is equivalent to a 133% tax concession.

Reacting to these announcements, MJA’s managing director, Kris Gale reflected, “in meeting with Senator Carr, he said he wanted an R&D tax program with ‘winners with no losers’, and that’s essentially what’s been delivered.”

R&D tax credit announcements

The new R&D tax credits take effect for income years commencing after 1 July 2010. Of particular significance, the change to an R&D tax credit system means that the rate of support will be decoupled from the corporate tax rate, whether that increases or decreases in future.

In addition, there will be a review of the program eligibility criteria in developing the new legislation and a consultation paper will be released in the next few months. This is a positive process, and we welcome the fact that changes to eligibility were not a part of tonight’s announcements.

One of the strengths of the current R&D definition is that it is based on industrial concepts of R&D. MJA looks forward to working with government to preserve this critical feature of the program. 

Groups with turnover less than $20 million

Where a group’s annual turnover is less than $20 million, companies will be eligible for a 45% refundable credit. This is equivalent to a 150% tax concession which is double the rate of support currently available under the base 125% program. This is a significant increase, as the current refundable offset has a group turnover limit of $5 million, and Aggregate R&D Expenditure capped at $1 million.

For the R&D tax credit the turnover limit has been increased to $20 million, and the cap abolished.

As a transitional measure, for the 2009/10 income year, the Aggregate R&D Expenditure cap will be lifted to $2 million to provide more support and flexibility for organisations that currently do not qualify.

The government estimates that 5,500 firms will benefit under these new arrangements.

Groups with turnover great than $20 million

Where group turnover is over $20 million, companies will be eligible for a 40% non-refundable credit, equivalent to a 133% tax concession, again one-third higher than the current basic rate of support.

Further, companies conducting R&D in Australia where intellectual property rights are held offshore (as for the current international premium R&D concession) will also able to access this credit.

Reform to existing programs

Both the current 175% premium and international premium will be abolished in line with the introduction of the new credit system, and the 2009/10 income year will be the last for claims under those programs. It appears that the government definitely reacted to feedback that these programs were unpredictable, didn’t dramatically influence new projects or provide a compelling reason to locate foreign-owned R&D in Australia.

No new competitive grants

In an overall sense the value of the support under these announcements is approximately $1.4 billion, however there were no new announcements in relation to competitive grants for R&D. Whilst there are initiatives for other areas (Commonwealth Commercialisation Institute and Clean Energy), there is no replacement for Commercial Ready and no commentary on additional funding for Climate Ready.

This means that discretionary grant-based R&D funds for classic projects appear to be at an end under the current government.

What questions do you have?

It’s always helpful to have your feedback on the articles we prepare, and the approach we’re taking in dealings with the government. This is particularly the case with a time-sensitive announcement such as the outcomes on budget night.

You can help us by filling out a Comment below this article on our website, and giving us any feedback you have on this initial summary of innovation policy as it relates to the 2009/10 federal budget.

If you post a question relevant to the area we’ll do our best to answer it in the more detailed analysis we will be preparing over the next 24 hours.