Article by Bernard O'Shea, David Stavropoulos and Anna Wilson
Changes to the research and development tax incentive system will see small companies receive a tax refund of 45% of their R & D spending when they file their tax return.
What incentives apply now?
Broadly speaking, Australian companies that incur research and development expenditure may be eligible for an accelerated deduction of up to 125% of the expenditure, provided a minimum expenditure threshold of $20,000 is met. Further, companies that have increased their R & D expenditure above their average R & D expenditure for the past 3 years may be eligible for an additional 50% deduction of the excess. Some companies may also choose to obtain a refundable tax offset instead of the accelerated deductions, provided additional criteria are met, one of which is a cap of $1 million on R & D expenditure.
What will be new?
The Government has announced a plan to replace the current R & D tax incentive system with a new tax credit system. The change is to commence in the 2010-2011 tax year. A refundable tax credit equal to 45% of expenditure on R & D will be available to companies with an annual turnover of less than $20 million. For companies which exceed the $20 million turnover threshold a tax credit equal to 40% of expenditure on R & D will be available, but it will not be refundable. The 40% tax credit will also apply to companies undertaking R&D in Australia where the intellectual property is held offshore.
The Government argues that a tax credit, available once a tax return is filed for the relevant year, is a better incentive than an accelerated deduction. The Rudd Government also points to the complexity of the current system, stating that the complexity leads to uncertainty about whether concessions may be available, acting as a further disincentive to invest in R & D.
A feature of the scheme is that small companies (presumably referring to companies under the $20 million turnover threshold) will be able to access the refundable credit even if they are experiencing tax losses, with no limit on the level of R&D expenditure they undertake. The Government intends this feature to provide a boost to start-up companies in areas such as biotechnology and information and communication technology.
The Government has announced a tightening of access to the R & D tax incentives so that only genuine R & D is supported. The savings from the tightening of the eligibility criteria are intended to fund improvements to the system. Exactly what the new eligibility criteria will be is not known.
As an interim measure, for 2009-2010 tax year the Government will allow access to the refundable tax offset for R & D expenditure of up to $2 million, instead of the current $1 million cap.
What are the uncertainties?
As stated above, legislation to implement the reforms is not yet drafted. In addition, as with all budget announcements, the planned R & D reforms must make it through both houses of Parliament before coming into effect, and the Government currently does not have a majority in the Senate.
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