Accounting impact of changes to non-refundable R&D incentives from 1 July 2021

Entities undertaking R&D activities with turnover greater than or equal to $20 million should note that the amount of R&D incentive you may be entitled to is changing for income years beginning on or after 1 July 2021. You may not be entitled to the same amount you have claimed in previous years for your tax credit/offset, i.e. 38.5% of your eligible R&D expenditure. There is now a new method for determining the amount of your R&D tax offset.

Two-tiered premium depends on R&D intensity

For income periods beginning on or after 1 July 2021, entities with turnover greater than or equal to $20 million are subject to a two-tier system based on the entity’s R&D intensity for determining the non-refundable R&D incentive.

Tier R&D intensity R&D premium over normal company tax rate
1 Up to 2% 8.5%
2 >2% 16.5%
Excess N/A Excess over $150 million is at company tax rate

What is R&D intensity?

R&D intensity is the intensity of R&D expenditure as a proportion of total expenditure for the year. It is calculated as follows:

R&D intensity = Eligible R&D expenditure
                                 Total company expenditure

For R&D intensity up to 2% of total company expenditure, the entity will receive an R&D incentive of 8.5% above the company tax, and for R&D intensity above 2%, it will receive an R&D incentive of 16.5% above the company tax rate.

Example

Entity ABC incurs total R&D expenditure of $1 million. Its total expenditure is $10 million; therefore, its R&D intensity is 10%.

Its aggregate turnover is $50 million so its company tax rate is 25% for the tax year ended 30 June 2022.

Entity ABC is entitled to a non-refundable R&D incentive of $399,000 (to be set-off against its income tax liability) which is calculated as follows:

R&D expenditure
(A)
Normal company tax rate plus R&D premium
(B)
R&D incentive
(A X B)
Amount if ordinary deduction @ 25% tax rate Incremental benefit of R&D incentive compared to 25% company tax rate (as an ordinary deduction)
$   $    
$200,000 33.5% (25% + 8.5%) 67,000 50,000 17,000
$800,000 41.5% (25% + 16.5%) 332,000 200,000 132,000
Total   399,000 250,000 149,000

Accounting

As the new intensity measures only affect the quantum of the R&D incentives, there should be no change to the accounting for the non-refundable R&D incentives. Please refer to our November 2020 Accounting News article for detailed examples on the different methods that can be used to account for non-refundable R&D incentives.

More information

If you would like to access to more detailed information regarding R&D incentives (how they work and accounting for them), we have a two-hour recorded session available at a cost of $150. Please contact Aletta Boshoff for more information.

Need help?

If you need assistance with accounting for R&D incentives, please contact BDO’s IFRS Advisory Team and for in-depth advice on the R&D incentive, please contact your local R&D tax expert.

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