Australian Federal Budget 2018-19
As expected, the Government has announced measures in this Budget that affect the application of the research and development (R&D) tax incentive. These measures are scheduled to apply from as early as 1 July 2018 and are expected to save the Government $2.4 billion over the forward estimates.
The Government’s response follows the 2017 R&D Tax Incentive Review conducted by Chair of Innovation Australia Bill Ferris, Australia’s Chief Scientist Alan Finkel, and Secretary to the Treasury John Fraser. While a number of the recommendations from this review have been ignored, the Government has picked up on the themes of increasing the integrity of the programme and focusing on rewarding additionality by introducing a tiered R&D intensity measure.
The proposed changes largely revolve around winding back the benefit available to larger claimants (those with an aggregated turnover of at least $20 million) who will see the net benefit of claims drastically reduce in most cases. Smaller claimants have fared somewhat better although those paying the lower company tax rate of 27.5 per cent will still see their benefit drop from 16 per cent to 13.5 per cent net benefit when in a tax payable position.
The only real winner appears to be medical research companies who have been carved out of a new $4 million annual refund cap. As such, their benefit will remain largely unchanged.
The Government has indicated that it will undertake a consultation process with industry to assess the impact of the changes, prior to a proposed start date of 1 July 2018.
The refundable R&D tax offset will be capped at $4 million annually, however this will likely only apply to a small number of claimants. Any claim in excess of $4 million will be carried forward as non-refundable offsets to future years. Clinical trials will be excluded from the $4 million cap.
The net benefit of the refundable offset will be fixed at 13.5 per cent by linking it to the company tax rate. The linking of the R&D benefit to a company’s tax rate will seek to remove the complexity of a variable benefit with changing corporate tax rates.
The Government will introduce a new ‘R&D Premium’ that has a tiered rate of benefit to reward those claimants with higher R&D intensity with higher rates of non refundable offsets.
The Government’s rationale for this change is that it will seek to better reward those claimants who spend more on R&D. With the majority of current large company claimants likely to sit in the lowest tier of benefit (4 per cent net benefit) and facing increased ‘compliance’ and ‘integrity’, there is a strong chance that many participants in this component will exit the program.
The tiers will be as follows:
|R&D Intensity||Benefit above claimant’s tax rate|
|0% - 2%||4%|
|2% - 5%||6.50%|
|5% - 10%||9%|
|10% and above||12.50%|
Intensity will be measured as R&D expenditure as a proportion of total expenditure for the year. The total expenditure cap on annual claims will be increased from $100 million to $150 million.
The Government will seek to increase the number of claims subject to review by increasing compliance activities and giving the Australian Taxation Office (ATO) and AusIndustry additional resources.
New transparency measures have also been flagged which will allow the ATO to publicise the details and quantum of R&D claims made by taxpayers.
The Government has also flagged technical changes to the feedstock and clawback provisions of the program, as well as the general anti-avoidance rules.
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