Budget Announces Changes To The R&D Tax Incentive: Things Just Got A Little More Complicated

May 8, 2018 Kris Gale

The 2018 Budget has announced a series of changes to the R&D Tax Incentive that are intended to come into effect on 1 July 2018.

In summary, the concern that some companies would be excluded from the program all together has not been realised. The changes see the R&D Tax Offset rates linked to matters such as prevailing company tax rates and demonstrated R&D intensity. A limit of $4 million has been applied to the annual cash rebate that can be accessed via the Refundable R&D Tax Offset with the exception of clinical trials.

A series of integrity measures have also been announced.

We quote the relevant parts of the Government’s Fact Sheet below in this MJA Update. In subsequent issues, we will analyse the announcements in depth.

For now, it’s fair to say that the R&D Tax Incentive just got a whole lot more complicated.

The main announcements are as follows:

Refundable R&D Tax Offset

The level of support available will be the claimant’s tax rate for the year plus 13.5 percentage points.

In addition, the Government will, from 1 July 2018:
• Introduce a $4 million annual cap on cash refunds for R&D claimants with aggregated annual turnover less than $20 million. Amounts that are in excess of the cap will become a non-refundable tax offset and can be carried forward into future income years;
• Exclude R&D tax offsets for clinical trials from the $4 million cap on cash refunds, recognising the critical role of R&D expenditure on clinical trials in developing life changing drugs and devices; and
• Amend the refundable R&D tax offset so it is a premium of 13.5 percentage points above the claimant’s company tax rate for that year.

Non-Refundable R&D Tax Offset

The Government has introduced a tiered scheme of support based on an organisation’s R&D intensity.

The level of support available will be the claimant’s tax rate for the year, plus:
• 4 percentage points for R&D expenditure between 0 per cent and 2 per cent R&D intensity (inclusive);
• 6.5 percentage points for R&D expenditure above 2 per cent to 5 per cent R&D intensity (i.e. not including R&D expenditure falling within the first 2 per cent of the claimant’s total expenses for the year);
• 9 percentage points for R&D expenditure above 5 per cent to 10 per cent R&D intensity (i.e. not including R&D expenditure falling within the first 5 per cent of the claimant’s total expenses for the year); and
• 12.5 percentage points for R&D expenditure above 10 per cent R&D intensity (i.e. not including R&D expenditure falling within the first 10 per cent of the claimant’s total expenses for the year).

Integrity Measures

The main measures announced are as follows:

Integrity – strengthening anti-avoidance rules in the tax law so the ATO can ensure taxpayers do not avoid paying their fair share of tax by using tax schemes involving the program; Enforcement: additional resourcing so the Government can help ensure that ineligible R&D claims are denied;
Transparency– publishing company names claiming the R&DTI and the amounts of R&D expenditure they have claimed, to improve public accountability for R&D claimants;
Guidance – enabling Innovation and Science Australia to produce public findings similar to the ATO, and provide more effective, binding guidance on the scope of what is eligible R&D. This will help ensure taxpayers do not unintentionally misinterpret the meaning of the law; and
Administration – imposing a three month limit on extensions of time available from when applications, registrations and reviews are due.

MJA looks forward to a vigorous debate about the impact of the proposed changes and we value any contributions and thoughts that you may have.

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