R&D Tax Incentive Overhaul

Since its implementation, successive governments have undertaken reviews into the effectiveness of the R&D incentive. The 2016 Review of the R&D Tax Incentive and the 2017 Innovation and Science “Australia 2030: Prosperity through Innovation” Strategic plan found the R&D tax incentive did not fully meet its policy objectives of inducing business R&D expenditure beyond “business as usual” activities.

As a response to the reports, the government announced in the 2018 Budget that it will be overhauling the R&D tax incentive to better target the program and ensure its integrity. In short, in draft legislation released, the government has proposed the introduction of an “R&D premium”, which is the rate of the non-refundable offset plus the applicable company tax rate. The premium will depend on the aggregated annual turnover of the company as well as the R&D “intensity” in some cases.

For companies with an aggregated annual turnover of $20 million or more, the R&D premium will be based on R&D intensity, calculated as a proportion of eligible R&D expenditure (up to $150m) and total expenditure (which will be based on the tax returns of the company applying for the incentive). The company will be entitled to differing percentage points of the non-refundable offset based on the intensity of the R&D activity varying from 4 percentage points for 0% to 2% intensity, to 12.5 percentage points for intensity above 10%.

For companies with aggregated annual turnover below $20m, the refundable R&D offset will be a premium of 13.5 percentage points above the applicable company tax rate. However, cash refunds from the refundable R&D tax offset will be capped at $4m per year and those amounts that cannot be refunded can be carried forward as a non-refundable tax offset to use in future income years. It has also been proposed that clinical trials will be exempted from the $4m refund cap, provided it satisfies the Therapeutic Goods Administration definition of a clinical trial.

The government said it was “committed to backing R&D investment and the economic opportunities and jobs it generates. At the same time, we need to make sure that the investment of taxpayers’ money is well targeted by encouraging companies to do more, and not just be rewarded for R&D they would have conducted without an incentive…by better targeting R&D investment, these changes will lead to new ideas, products, services and jobs.”

The proposed overhaul has been met with a subdued response from various industry groups, particularly in the technology and digital space which see the proposed changes as potentially being limiting. There is concern that start-ups that incur high R&D costs prior to earning significant income may worse off as the refund cap could reduce their cash flow at a time when they need it the most.