R&D Tax Refund Confusion

July 8, 2015 Kris Gale

The 2014/15 financial year has come to an end, and with the ‘Tax and Superannuation Laws Amendment (2015 Measures No. 3) Bill 2015’ not scheduled to be debated until sometime after Parliament reconvenes on 10 August, many companies have been left in an uncertain position in terms of what to do when claiming the cash back option under the 45% Refundable R&D Tax Offset.

The Bill proposes a 1.5% across-the-board cut to the R&D Tax Offset rates, reducing the rate to 43.5% for companies who have an annual group turnover of between $2 million and $20 million and 38.5% for companies with an annual group turnover of greater than $20 million. If passed, these changes will apply retrospectively from 1 July 2014.

In particular, companies who are eligible for the cash back option and are affected by the potential rate cut have been left in a quandary as to how to approach making an application for their refunds in terms of the correct rate to apply. This is a reflection of the fact that they are typically keen to start the claiming process in July so they can secure the refund as soon as possible.

In order to provide some guidance on the issue the ATO has released advice relating to the administration treatment of retrospective legislation.

Should the Bill pass, it will increase the tax liabilities of claimant companies as they will be entitled to a smaller tax offset rate. The ATO advises that it has no authority to collect the new/higher liabilities until the relevant law is enacted. In addition, other advice provided by the ATO for similar situations states that should an increase in liability be enacted no shortfall penalties will apply, nor will the taxpayer be liable for interest accrued on the shortfall.

Taxpayers have the option of:

Claiming at the proposed lower rates of offset (43.5% and 38.5%), and in the event that the Bill is not enacted, amending their tax returns for an additional 1.5% R&D Tax Offset; or
Claiming at the existing rates of offset (45% and 40%), and in the event that the Bill is enacted, amending their tax return to repay the 1.5% R&D Tax Offset they are no longer entitled to.
MJA’s position is that companies who are seeking to submit their tax returns in July, prior to the Bill being debated, should consider claiming at the existing rate of offset as there will be no penalties or interest charges applicable for doing so. This is particularly salient for companies who are eligible for the Refundable R&D Tax Offset (those with a turnover of between $2 million and $20 million and who are in tax loss) and in need of capital injections. However it is advisable that those companies who are claiming at the existing rate of offset should ensure that they will be in a position to honour an increased tax liability should the Bill be enacted.

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