Technical Update:

Proposed changes to the Research and Development Tax Incentive

05 December 2019

Nicola Purser , Partner, Research & Development |

The Federal Government has reintroduced draft legislation to amend the Research and Development Tax Incentive, which is intended to retrospectively apply from 1 July 2019. The proposed measures reintroduced in this Bill will amend the available tax offset rates as follows:

Entities with aggregate turnover of less than $20 million

  • The corporate tax rate (currently 27.5%) plus a 13.5% incentive component, refundable up to a cap of $4 million (excluding clinical trial costs*).

Entities with aggregate turnover greater than $20 million

  • The corporate tax rate, plus a tiered incentive component applied incrementally.
R&D expenditure as a percentage of total business expenditure Incentive component
0-4% 4.5%
4-9% 8.5%
>9% 12.5%

By way of example, a company with $1m in R&D expenditure and $10m of total expenditure will have an intensity rate of 10%.  It will be entitled to a 4.5% incentive component on the first $400k of R&D expenditure, 8.5% on the next $500k of R&D expenditure and 12.5% on the last $100k of R&D expenditure.  Accordingly, its net total benefit will be $73,000 or 7.3% of R&D expenditure. 

Other changes include:

  • Increasing the R&D expenditure threshold from $100 million to $150 million
  • Adjusting the treatment of feedstock input expenditure and government recoupments through additional assessable income, to claw back the incentive component associated with these aspects of an R&D Tax Incentive claim
  • Increasing Innovation and Science Australia’s ability to make binding determinations about its application of the program
  • The ATO will publish information on claimants of the incentive and their R&D expenditure for greater transparency.

BDO comment

It is disappointing to see the Government has not followed the advice of the Senate committee in reconsidering the $4 million cap on the refundable component of the tax offset, and the intensity measures applied to non-refundable offsets. By the Government’s own estimates, this will result in $1.8 billion being returned to the Budget, rather than invest in Australian business over the foreseeable forward estimates.

If you would like more information on the proposed changes to the R&D Tax Incentive, please contact a BDO adviser.

Read media release:  BDO concerned with Government’s changes to R&D Tax: “little thinking has been done”

*The clinical trial exemption only applies for the purposes of the R&D tax offset if the R&D entity has registered an activity both as an R&D activity and an activity that forms part of a clinical trial and if the R&D activities are registered with the Board of Innovation and Science Australia.