R&D Tax Incentive – What’s In This Year’s Easter Basket?

February 14, 2015 Kris Gale

After this morning’s excitement in Canberra, it is probably fair to assume it will be back to business as usual. And on the first day of the Senate, our old friend, the Tax Laws Amendment (Research and Development) Bill 2013 is listed as Number 5 in the order of business.

One thing that can be said about the ongoing saga about this Bill (first announced two years ago; up to its third version) is that it can’t be said to be rushed through. Yet it is possible that the Senate will be voting today on the Palmer United Party amendment which introduces a group claim cap of $100 million. This was introduced late last year and has not been debated in the House Of Representatives nor been the subject of any public submissions or scrutiny. It represents a fundamental change to the original idea of the total exclusion from claiming of company groups whose whole annual Australian assessable income exceeds $20 billion.

Furthermore, it would be a vote that would occur without explicit recognition of the outstanding Tax & Superannuation Laws (2014 Measures No. 5) Bill 2014, which cuts 1.5% from the current R&D Tax Offset rates of 45% and 40%. The recent announcement of the abandonment of the Paid Parental Leave scheme was not accompanied by confirmation that the 1.5% levy proposed on large companies will also be dropped. As a result, the second Bill represents a permanent cut of 15% of the R&D Tax Incentive (the Incentive) benefit, assuming that the head corporate tax rate does move to 28.5% (38.5% offset less 28.5% foregone tax deduction less 1.5% large business levy = 8.5% net benefit, 15% lower than the current 10% net benefit).

Given the plenty of ‘ifs’ regarding the overall company tax rate, it is self-evident that deciding upon the 2013 Bill is textbook ‘cart before the horse’ stuff. As such, it is time for the Federal Government to bring some sorely-needed stability to the situation and do what they undertook to do when in opposition.

Both Bills should be set aside and the Incentive be reviewed in the context of the long-awaited tax reform process. We understand a tax reform discussion paper is imminent as a precursor to the Taxation White Paper. The overall direction taken in the reform process directly impacts the design and effectiveness of the Incentive. Until we get the overall picture established, making discrete changes to the innovation support framework will further undermine an area that has been struggling for clear air for more than half a decade.

It is hoped that the Senate can see that the whole shebang of tax reform means that now is not the time to be making changes to the flagship Incentive. As they often say, these are interesting times.

Should you wish to discuss this matter any further, please do not hesitate to contact Kris Gale directly on (02) 9810 7211 or on kris.gale@mjassociates.com.au