After more than two years of uncertainty over the fate of the new R&D Tax Credit (Tax Credit), the relevant bills have been passed by Parliament with the support of the crossbench senators and await Royal Assent. The new program commenced on 1 July 2011 (instead of the original start date of 1 July 2010). As the new Tax Credit has a number of significant differences to the former R&D Tax Concession, taxpayers should analyse their arrangements in the light of these new rules.

Given that R&D is crucial to the life sciences sector in Australia, the new R&D Tax Credit will be of particular interest to taxpayers in this sector.

Overall, small businesses that conduct pure research are likely to be the big winners under the Tax Credit and large taxpayers that conduct R&D as a broader part of their commercial activities are likely to be worse off than under the former R&D tax concession. AusBiotech's CEO, Dr Anna Lavelle has described the passing of the R&D bills as a 'momentous day for innovation in Australia and the most significant positive news that the industry has had for a number of years'.

Summary of the Tax Credit

The Tax Credit (replacing the R&D Tax Concession) comprises:

  • a 45% refundable R&D tax offset for taxpayers with a turnover of less than $AU20 million
  • a non-refundable 40% R&D tax offset for all other taxpayers.

The 'object of (the Tax Credit) is to encourage industry to conduct research and development activities that might otherwise not be conducted because of an uncertain return from the activities, in cases where the knowledge gained is likely to benefit the wider Australian economy'. This is achieved by 'providing a tax incentive for industry to conduct, in a scientific way, experimental activities for the purpose of generating new knowledge or information in either a general or applied form'.

There is a number of important aspects to the Tax Credit, including:

  • The Tax Credit applies to all income years starting on or after 1 July 2011.
  • The 40% and 45% offsets under the Tax Credit will result in greater benefit for eligible R&D activities. In particular, the 45% refundable offset is broader than the refundable tax offset under the former R&D tax concession (which only applied to businesses with a turnover of less than $5 million).
  • The eligibility requirements for claiming R&D activities have been tightened compared to the former R&D tax concession. This is achieved through a narrower definition of 'core' R&D activities for all businesses and imposing a dominant purpose test on businesses in relation to particular 'supporting' R&D activities.
  • The Government has acknowledged that the new rules are likely to limit claims by many large businesses (described as 'business as usual claims') and to benefit smaller firms undertaking risky R&D activities ('genuine R&D').
  • According to Innovation Minster, Kim Carr, 'The R&D Tax Credit will deliver more funding to innovative firms including manufacturers, ICT and biotech'.
  • The types of entities eligible for the Tax Credit are broader than the former R&D tax concession and include certain foreign corporations and public trading trusts.
  • R&D activities conducted in Australia will be eligible regardless of where the resulting intellectual property is held. Once again, this is broader than under the former R&D tax concession.
  • There is more opportunity under the Tax Credit to claim R&D activities that take place outside Australia.
  • Quarterly payments are to be introduced for small and medium businesses from 1 January 2014.

What should taxpayers do?

Now that the bills have been passed, taxpayers can start to focus on the application of the new rules to their arrangements. While the uncertainty regarding the status of the Tax Credit has been resolved, some uncertainty remains about the new concepts and provisions in the new legislation. Taxpayers now need to shift their attention to the new rules and the impact those rules will have on their businesses, including their entitlements under the new rules and ensuring their contractual arrangements with its customers and others (such as joint venture partners) do not prejudice their entitlement to make claims under the new rules.

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