In the 2009–2010 Budget, the Commonwealth Government announced it would replace the existing research and development (R&D) tax concession with a new R&D tax incentive. The current system is quite complicated, involving a 125 per cent R&D Tax Concession, a tax offset, a 175 per cent premium and an international premium.
The new incentive will be simpler and provide increased benefits, the two core components being a 40 per cent standard R&D tax credit and a 45 per cent refundable R&D tax credit for companies with a turnover of less than $20 million.
On 18 December 2009, the Government released the draft legislation for the new R&D Tax Credit which follows on from the consultation paper released in September 2009.
The Government plans to introduce the legislation into Parliament in early 2010 in time for it to commence from 1 July 2010.
The standard R&D Tax Credit
The scheme will involve a tax credit rather than the tax deduction which is available under the current scheme. A tax credit, or offset, reduces the amount of tax payable whereas a deduction has the effect of reducing a company's taxable income. For companies with a grouped turnover of more than $20 million, there will be a tax credit at a rate of 40 per cent for eligible R&D expenditure, which can be carried forward where a company's income tax liability for a particular year is zero. However, it cannot be used to reduce other tax liabilities, such as GST. This tax credit provides a better incentive than under the current system, where a 125 per cent deduction is available, as a tax credit of 40 per cent is equivalent to a tax deduction of 133 per cent.
The refundable R&D tax credit
Companies with a grouped turnover of less than $20 million will have access to a refundable R&D tax credit at a rate of 45 per cent of expenditure on eligible R&D activities. However, this refundable tax credit is not available to foreign-owned companies or where the intellectual property resulting from the R&D activity is foreign-owned.
If this credit reduces a taxpayer's income tax liability to zero, any unused refundable tax offset amount can be applied to reduce other tax liabilities. Any residual unused amount can be refunded as cash to the company. This tax credit is equal to a tax deduction of 150 per cent.
Who will be eligible?
The R&D tax incentive is available to Australian-incorporated companies, including both Australian-owned and foreign-owned companies, undertaking eligible R&D activities. Under the current scheme, the location of ownership of any resulting intellectual property is relevant to determining eligibility. If the intellectual property was to be foreign-owned, then the company was not eligible under the scheme. However, this will not be relevant to determining eligibility under the new scheme.
The new scheme will also be available to more companies owned by exempt entities (such as universities) than under the current scheme. It will be open to companies with up to a 50 per cent ownership by exempt entities, as opposed to the 25 per cent cap that currently applies.
What are eligible activities?
The general rule will be that eligible R&D activity must be conducted in Australia. After receiving submissions on the consultation paper, the Government will consider whether the limited exceptions to this rule that apply under the current scheme should be retained.
Eligible core R&D activities will be defined as systematic, investigative and experimental activity that:
- involves both innovation and high levels of technical risk
- is for the purpose of producing new knowledge or improvements.
This is different from the current definition which only requires either innovation or risk, not both.
Companies will continue to be able to claim expenditure on supporting activities (those carried on for a purpose directly related to carrying on a core R&D activity). However, the Government has stated that the new definition will be more stringent than the current definition. This is because a considerable portion of the current R&D tax concessions subsidises supporting, rather than core, activities. The Government is attempting to limit the ability of businesses to combine a small proportion of core R&D activities with a large proportion of supporting activities, and then claim the tax concession for the entire cost. Proposed measures include capping expenditure on supporting activities as a proportion of expenditure on core R&D, implementing a test requiring eligible supporting activities to be solely for the purpose of core R&D activity, implementing a net expenditure test or applying a lower rate of assistance to supporting activities.
Conclusion
These amendments make the scheme much less complex than the current system and the use of a credit, rather than deduction, gives businesses the ability to calculate their potential benefits with much more certainty. It is expected that small to medium-sized enterprises will benefit from the changes, as they can access the higher refundable tax credit. However, they may not be as beneficial for mining and manufacturing companies, who have typically benefited from the ability to use supporting activities to claim much larger amounts. This result appears to be exactly what the Government is aiming for.
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