As some of you may be aware the 2018 Federal Budget was handed down on Tuesday 8 May 2018. As anticipated there were some changes to the Research and Development (R&D) Tax Incentive. Whilst the proposed changes are not law at this stage, below are the proposed changes expected to start from 1 July 2018.
The changes can be broken down to three categories:
- R&D Entities with turnover under $20m
- R&D Entities with turnover above $20m
- Integrity measures
I will discuss each separately below.
R&D Entities with turnover under $20m
The Government proposes the following changes to the R&D Tax Incentive for entities with turnover under $20m:
- Introduction of a $4 million annual cap on cash refunds for R&D (previously there was no cap);
- Amounts that are in excess of the cap will become a non-refundable tax offset that can be carried forward into future income years;
- R&D tax offsets for clinical trials in developing life changing drugs and devices will be excluded from the $4 million cap;
- The R&D tax offset rate is now linked to the R&D claimants tax rate + 13.5%
If the applicable corporate tax rate of the entity is 27.5% the offset will be 41% (previously 43.5%). Therefore, this group of R&D entities will lose a 2.5% benefit under the proposed changes
If the applicable corporate tax rate of the entity is 30% the offset will be 43.5% (also previously 43.5%). This group of R&D entities will be unaffected by the changes
Whilst the above changes to the R&D tax offset allows for the alignment of the R&D tax offset with the corporate tax rate (which may change from year to year depending on the circumstances of the corporate tax entity), the proposed changes may diminish the attractiveness and benefit of the R&D Tax Incentive to those R&D entities with a corporate tax rate of 27.5%.
R&D Entities with turnover above $20m
The Government proposes the following changes to the R&D Tax Incentive for entitles with turnover above $20m:
- Non-refundable tax offset linked to R&D “spend intensity” and the corporate tax rate
- The rate of the R&D tax offset increases with the level of R&D spend (that is, the proportion of R&D expenditure over total annual expenditure or “spend intensity”). The proposed changes will provide multiple rates of non-refundable R&D tax offsets, with the rate of the offset increasing with the intensity of the claimant’s incremental R&D expenditure.
- Cap of R&D expenditure has been raised from $100m to $150m
The table below outlines how the proposed R&D tax offset rates will apply for R & D entities:
The Government also announced some integrity measures namely:
- Providing funding to facilitate additional resourcing to help ensure that ineligible R&D claims are denied;
- Publishing company names claiming the R&D Tax Incentive and the amount of R&D expenditure they have claimed;
- Enabling Innovation and Science Australia to produce public findings similar to the Australian Tax Office (ATO), and provide more effective, binding guidance on the scope of what is eligible R&D; and
- Imposing a three month limit on extensions of time available from when applications, registrations and reviews are due.
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