R&D Tax Concessions

Budget 2018- R&D Scheme Changes Proposed From 1 July 2018

Changes are to be implemented with effect from 1 July 2018.

Companies with aggregated annual turnover of $20 million or more

There will be an R&D premium that ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenditure for the year.

“Intensity” is the percentage measure of R&D expenditure as a proportion of an entity’s total expenditure.

The marginal R&D premium will be the claimant’s company tax rate plus:

  • 4% for R&D expenditure between 0% to 2% R&D intensity;
  • 6.5% for R&D expenditure above 2% to 5% R&D intensity;
  • 9% for R&D expenditure above 5% to 10% R&D intensity; and
  • 12.5% for R&D expenditure above 10% R&D intensity.

The R&D expenditure threshold – the maximum amount of R&D expenditure eligible for concessional R&D tax offsets, will be increased from $100 million to $150 million per annum.

Companies with aggregated annual turnover below $20 million

The refundable R&D offset will be a premium of 13.5% above a claimant’s company tax rate. Cash refunds from the refundable R&D tax offset will be capped at $4 million per annum. R&D tax offsets that cannot be refunded will be carried forward as non-refundable tax offsets to future income years. Refundable R&D tax offsets from R&D expenditure on clinical trials will not count towards the cap.

Progress of legislation

The Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018 has been introduced to the Federal Parliament.

New lawCurrent law
The expenditure threshold
The R&D expenditure threshold is increased to $150 million.The R&D expenditure threshold applies to eliminate the incentive component of the R&D tax offset in relation to notional deductions in excess of $100 million.
The R&D expenditure threshold is a permanent feature of the law.The R&D expenditure threshold is legislated to cease on 1 July 2024.
The R&D Tax Offset for small R&D entities
R&D entities with aggregated turnover of less than $20 million are generally entitled to an R&D tax offset rate equal to their corporate tax rate plus a 13.5 per cent premium.R&D entities with aggregated turnover of less than $20 million are generally entitled to an R&D tax offset rate of 43.5 per cent.
The amount of a refund that an R&D entity can receive is capped at $4 million per annum.

Offset amounts that relate to expenditure on clinical trials do not count towards the cap and remain refundable.

R&D entities with aggregated turnover of less than $20 million are entitled to a tax refund for any R&D tax offset they receive in excess of their income tax liabilities.
The R&D Tax Offset for large R&D entities
R&D entities with aggregated turnover of $20 million or more are entitled to an R&D tax offset equal to their corporate tax rate plus a premium based on the level of their incremental R&D intensity for their R&D expenditure.R&D entities with aggregated turnover of $20 million or more are entitled to a non-refundable R&D tax offset at a rate of 38.5 per cent.

 

R&D Scheme From 1 July 2014

Amendments have been enacted to limit R&D claims for expenditure above $100 million to a tax offset calculated at the company tax rate (30%). The measure takes effect from 1 July 2014 and has application until 30 June 2024.

When announcing the measure the Treasurer, Joe Hockey has said that fewer than 25 companies are expected to be affected.

Expenditure below $100m offset reductions

The government has also reduced the existing offset rates by 1.5% from 45% to 43.5% and from 40% to 38.5% for the refundable and non-refundable tax offset rates respectively. This was first flagged in the 2014 Budget.

These rates apply from 1 July 2016. For details of the amending legislation see Budget Savings (Omnibus) Bill 2016.

(The current offset rates are here.)

Quarterly credits abandoned

A government-announced proposal to allow companies with aggregated turnover of less than $20 million to obtain the cash flow benefit of the their R&D offset offset on a quarterly basis, rather than waiting for a tax assessment was intended to commence 1 January 2014. However along with a number of other measures it was confirmed by the Federal Treasurer Joe Hockey in December 2013 that this measure would not proceed.

Further information:

Deadline for registration

Companies that have undertaken R&D activities during the financial year ended 30 June must register their activities with AusIndustry by the following 30 April to qualify for the R&D Tax Incentive. If the deadline falls on a weekend or public holiday the effective final lodgement date is the next business day.

Non-30 June balancing companies have a registration lodgement date which is the end of the tenth month following the substituted accounting period end.

The Current R&D Incentive Scheme

(as applicable since 1 July 2011)

The existing R&D Tax Incentive scheme provides two core components:

  • a 43.5% refundable tax offset on eligible expenditure for eligible entities less than $20 million turnover, or
  • 38.5% non-refundable tax offset for eligible entities with turnover of $20 million or more

For financial years up to 30 June 2016 the the refundable offset rate was 45% and the the non-refundable offset rate was 40%.

The research and development tax incentive provides a tax offset for eligible R&D activities and is targeted toward R&D that benefits Australia. The incentive came into effect on 1 July 2011 to replace the former R&D tax concession.

Basic Eligibility

To be eligible for the R&D tax incentive you must be an R&D entity, engaging in eligible activities and in most cases have notional R&D deductions of at least $20,000.

Registration annually

Registration is required:

  • for every income year the offset is claimed
  • within 10 months of the end of your company’s income year
  • prior to claiming the R&D tax offset in the company income tax return.

‘Eligible activities’ must meet a definition of core R&D activities. Other activities may be eligible as supporting R&D activities.

Detailed explanations and registration information: Ausindustry.

The Tax Office has issued a number of alerts targeting potentially incorrect R&D tax claims:

  • Building or construction activities. TA 2017/2 refers to certain building or construction expenditure which is expressly excluded from being taken into account in calculating an R&D tax offset, or which does not otherwise relate to eligible R&D activities
  • Ordinary business activitiesTA 2017/3 refers to expenditure which relates to ordinary business activities and not to eligible R&D activities.
  • Software developmentTA 2017/5 refers to R&D Tax Incentive claims for certain software development costs which are not eligible R&D activities. An addendum to TA 2017/5 seeks to further clarify when routine testing steps in software development projects should not be claimed,
  • Ineligible agricultural activities. TA 2017/4 refers to R&D Tax Incentive claims for certain agricultural activities which are not eligible R&D activities. This includes activities carried on by family trusts, such entities not being eligible to claim.

Pre July 2011 – and the transition from the R&D tax concession to the R&D tax incentive

Prior to 1 July 2011, the R&D tax concession allowed companies to claim a tax deduction of up to 125% (and in some cases up to 175%) of eligible R&D expenditure.

R&D expenditure incurred in respect of R&D activities performed prior to 1 July 2011, continue to be claimed under the R&D tax concession.  See ATO detailed notes.

Further information

 

This page was last modified 2018-10-19