Read: Access full Federal Budget 2018-19 review here
Research and Development (R&D) Tax Incentive Reform
The measures are consistent with the Government’s stated intention of rewarding those companies whose R&D activities provide the greatest spillover benefits to the Australian economy. The changes are estimated to produce savings of approximately $300 million per year - approximately 10% of the R&D tax benefits currently claimed by taxpayers.
For companies with annual group turnover of less than $20 million, the incentive will remain a refundable offset but at a reduced rate of 41.0 percent (down from 43.5) of eligible expenditure for the 2018-19 and later years. The reduced rate still provides a net additional benefit of 13.5 percent of eligible expenditure. Further, cash refunds for small R&D companies will be capped at $4 million per annum. The excess above that cap can be carried forward but only to be used as a non-refundable offset. R&D expenditure on clinical trials will not count towards this cap.
For companies with group turnover of $20 million or more, the R&D tax benefit will be dictated by the claimant company’s “R&D intensity” – that is, the percentage that annual R&D expenditure bears to total expenditure. The incentive for large R&D companies will continue to be a non-refundable offset calculated at the claimant company’s tax rate (27.5 per cent where group turnover for 2018-19 is between $20 million and $50 million, and 30 per cent where it exceeds $50 million) plus:
- 4 percentage points where R&D intensity is between 0 to 2 per cent;
- 6.5 percentage points where R&D intensity is between 2 per cent to 5 per cent;
- 9 percentage points where R&D intensity is between 5 per cent to 10 per cent; and
- 12.5 percentage points where R&D intensity is above 10 per cent.
The R&D expenditure cap for large R&D companies will be increased from $100 million to $150 million.
The integrity of the R&D program will be strengthened with increased resourcing for both regulators (the Australian Taxation Office and AusIndustry) and the publication of further guidance material. Other changes include providing the ATO with the ability to release details of companies claiming the incentive.
Pitcher Partners does not expect the changes to severely impact the level of R&D spending by small R&D companies, particularly given the ability to carry forward any offsets in excess of the $4 million refundable cap. However, in line with recent compliance activity, the increased resourcing available to both regulators will mean that taxpayers will likely face increased scrutiny in respect of their R&D claims.