• Federal Budget 2020-2021

Research and Development Tax Incentive

The Government has announced an about-face to Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019, which was due to apply in its current form, retrospectively for income years commencing on or after 1 July 2019. This bill was set to introduce a range of questionable measures designed principally to reduce the cost of the incentive by $1.8bn, over four years. 

Instead, the Government will retain much of the structural changes embodied in the previous bill, and proposes to increase R&D funding through a range of amendments to thresholds and rates of assistance that will encourage both large and small companies to invest in conducting R&D activity.

The changes to the bill, to take effect from 1 July 2021, will:

  • Retain the much maligned intensity measure as a means of providing variable rates of assistance to large companies, depending on the level of R&D expenditure as a proportion of total expenditure. However, the tiers have been made more attractive for large companies through a significantly simplified 2 tiered structure with a single realistic proposed intensity threshold of 2% of total expenditure above which a premium rate (16.5%) of R&D assistance is applied
  • Return the refundable offset rate to 43.5% by increasing the incentive component to align with the reduction in the corporate tax rate
  • Remove the proposed $4 million cap on the refundable offset.

In what will be a relief for many R&D Tax Incentive claimants, the tax incentive will remain unchanged for the 2019 and 2020 financial years.

All other measures in the bill are retained including increasing the expenditure cap to $150 million.

Rates of benefit

  • From 1 July 2021, companies with a turnover of less than $20 million will attract a tax incentive of 18.5% above the prevailing company tax rate. With a 25% company tax rate proposed for the 2022 financial year, companies with sufficient losses will retain the ability to receive 43.5 cents for every dollar spent on R&D
  • Companies with an annual aggregated turnover of $20 million or greater will continue to be entitled to the non-refundable offset of 8.5% above the company tax rate. However, those which spend more than 2% of total expenses will be entitled to an additional 8% intensity premium, resulting in a potential incentive of 16.5%.

Income years commencing on or after 1 July 2019

Aggregated Turnover <$20 million (Refundable Tax Offset)

 

Aggregated T/O <$20m

Offset Rate

43.5%

Company Tax Rate

27.5%

Net Benefit

16%

Aggregated Turnover >$20 million (Non-Refundable Tax Offset)

 

Aggregated T/O >$20m <$50m

Aggregated T/O >$50m

Offset Rate

38.5%

38.5%

Company Tax Rate

27.5%

30%

Net Benefit

11%

8.5%

Income years commencing on or after 1 July 2020

Aggregated Turnover <$20 million (Refundable Tax Offset)

 

Aggregated T/O <$20m

Offset Rate

43.5%

Company Tax Rate

26%

Net Benefit

17.5%

Aggregated Turnover >$20 million (Non-Refundable Tax Offset)

 

Aggregated T/O >$20m <$50m

Aggregated T/O >$50m

Offset Rate

38.5%

38.5%

Company Tax Rate

26%

30%

Net Benefit

12.5%

8.5%

Income years commencing on or after 1 July 2021

Aggregated Turnover <$20 million (Refundable Tax Offset)

 

Aggregated T/O <$20m

Offset Rate

43.5%

Company Tax Rate

25%

Net Benefit

18.5%

Aggregated Turnover >$20 million (Non-Refundable Tax Offset)

 

Total expenses

R&D offset rate

Tier 1

Notional deductions representing up to and including 2 per cent of total expenses

8.5% above the company tax rate

Tier 2

Notional deductions representing above 2 per cent of total expenses

16.5% above the company tax rate

BDO Comment

The retention of the intensity measure for large business, not only adds complexity but discriminates against certain industries such as manufacturing and agriculture sectors in particular. The beauty of the R&D tax incentive as originally designed is that it is industry agnostic.

That said, BDO welcomes the proposed changes to the Government’s controversial bill. However, it is a pity that it has taken a global pandemic and recession for the Government to realise the economic benefits of encouraging investment in research and development. It is in adversity that successful businesses will invest and adapt. In fact, it is in the absence of that adversity where the Government needs to provide support to encourage investment in higher risk/reward ventures.  Accordingly, as the country continues to deal with the economic and health issues arising due to COVID-19, we would encourage the Government to continue to maintain, or increase, its support for this important incentive for the longer term.

BDO would also encourage the Government to look to the taxation system to encourage commercialisation of technology arising from the R&D Tax Incentive through a tax regime similar to the ‘Patent Box’ regime in the UK that would provide an effective incentive for companies to not only develop technology but to retain its ownership and commercialisation in Australia. 

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