Technical Update:

Changes to the R&D Tax Incentive Program offset rate

27 September 2016

Nicola Purser , Partner, Research & Development |

The Federal Government and the Labor Party have struck a deal to deliver billions of dollars of budget savings and repair the budget through the Government’s $6 billion Omnibus Bill.

One of the 24 measures included in the Bill was the re-introduction of a Bill to cut the tax offset rate for all eligible entities under the R&D Tax Incentive Program by 1.5% to 43.5% for companies with a group turnover under $20 million, and 38.5% to companies with a group turnover over $20 million.

This measure was originally included in the Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014 that was introduced into Parliament on 4 September 2014. However, unlike the previous unsuccessful incarnations of this Bill, which was to apply from 1 July 2014, this Bill proposes to cut the rate for R&D income years commencing on or after 1 July 2016.

The R&D tax offset was originally introduced when the corporate tax rate was a flat 30% for all companies.  The R&D tax offset was then 45% (refundable) for companies with a group turnover under $20 million, and 40% (non-refundable) for companies with a group turnover of $20 million or more, which gave a 15% or 10% tax discount when compared to the 30% company tax rate.

When the reduction of the R&D tax offset was originally proposed in 2014, it was proposed together with a general company tax rate reduction to 28.5% from 1 July 2015.  The reduced R&D offset was designed to maintain the same tax benefit after the company tax rate reduction to 28.5% but the R&D tax offset rate reduction was to apply early, from 1 July 2014. However, the Government then decided to restrict the reduced 28.5% company tax rate to companies with turnover of less than $2 million, while continuing with the R&D tax offset reduction for all eligible companies, whether or not their turnover was under or over $2 million.  But, the Government could not get the R&D tax offset reduction through Parliament until now (but with a later start date of 1 July 2016).

In 2016-17 Federal Budget the Government announced a ten year progressive company tax rate reduction program to start from 1 July 2016, with a reduction to 27.5% tax rate for companies with group turnover of less than $10 million. The turnover threshold for the lower rate would progressively increase and the lower tax rate would progressively decrease until 2026-27 when the company tax rate is proposed to be 25% for all companies. The Bill for the ten year company tax rate reduction program is currently being considered by the Senate Economics Committee.

The Government has not as yet proposed to reduce the R&D tax offset rate to align with these progressive company tax rate reductions.   

What does this mean for your company?

The amount of the tax benefit that your company will be able to obtain from the R&D tax offset will depend on a number of factors.  The first of these factors is whether the Bill for the ten year company tax rate reduction will be passed by Parliament (the Senate Economics Committee is due to give its report on 10 October 2016). 

If we assume the Parliament, at least, passes the first rate reduction to 27.5% for companies with less than $10 million group turnover, the tax benefit that companies will receive from the R&D tax offset for the 2016-17 tax year is outlined in the table below:


Group Turnover

Company Tax Rate

R&D Tax Offset Rate

Tax Discount Percentage

Refundable or Non-refundable

Less than $10 m

27.5%

43.5%

16%

Refundable

Between $10m - $20m

30%

43.5%

13.5%

Refundable

$20m or more

30%

38.5%

8.5%

Non-refundable

If the ten year company tax rate reduction program is passed into law, this table will change each year for the next ten years. It is also not clear whether the Government intends to further reduce the R&D tax offset to account for the proposed reduced company tax rates over the next ten years.

BDO comment

The impact of the R&D Offset rate cuts and the proposed ten year company tax rate reduction program provides more uncertainty for the broader innovation community. More uncertainty is not what businesses need in these times of global political and economic change.

We recommend that companies take action now to proactively plan their future R&D activity and spend, to ensure they can maximise their R&D claims going forward under the R&D Tax Incentive Program.

If you need assistance with planning your future R&D activities or to understand how these changes will impact your company, do not hesitate to contact your BDO tax adviser.