Along with many other stakeholders in the Start-up and Innovation Funding sector, NOAH was delighted to see the Morrison Government enhance the value of the R&D Tax Incentive program by committing to additional investment in its 2020 Budget over the forward estimates period. That is to say, that the Refundable R&D Tax Offset rate has been significantly increased and the Non-Refundable R&D Tax Offset benefit has, at the very least, been maintained.

In so doing, the Government has abandoned its controversial plan to cut $1.8B from the program in an acknowledgment that business investment in research and development will be a critical element in the post-COVID economic recovery. Such a view is obviously shared by the major parties because the legislation enacting the R&D tax boost was swiftly passed by Parliament last Friday without amendment.

The changes will take effect from 1 July 2021 and are expected to support more than 11,400 businesses both large and small.

Small businesses

For small companies turning over less than $20 million, the Refundable R&D Tax Offset will be increased to 18.5% above the claimant’s corporate tax rate, and the $4 million cap on annual cash refunds will not proceed.

Large businesses

For larger claimants turning over more than $20 million, the much maligned and complex R&D intensity test for the Non-Refundable R&D Tax Offset has been simplified by being reduced from three to two tiers. Moreover, the rates for these two tiers have been increased with an R&D intensity of 0–2% under Tier 1, which is now attracting an additional tax offset of 8.5% (which is on a par with the current non-refundable value proposition). Those companies that commit a greater proportion of their business expenditure to R&D — i.e. those characterised by R&D intensities in excess of 2% — will be far better-off under the changes by being entitled to a 16.5% tax offset on the increment of R&D expenditure above the 2% threshold.

Offset rates in FY22

In essence, the new reforms will decouple the R&D Tax Offset rate from the company tax rates, fixing the Refundable R&D Tax Offset rate at 18.5%, and the Non-Refundable R&D Tax Offset rate at 8.5% or 16.5% over the prevailing corporate tax rate (depending upon the claimant’s R&D intensity level).

The effect of this decoupling is that R&D tax claimants will no longer see incremental increases in their net R&D benefit arising from the falling of corporate tax rates. For example, the maximum tax benefit under the Refundable R&D Tax Offset will remain at 43.5 cents in the R&D dollar in FY22 when these changes first take effect. This 43.5 cent benefit being made up of the 25% corporate tax rate that will be applicable to base rate entities in that year plus the additional 18.5% Refundable R&D Tax Offset. This is but a minor consideration in the scheme of things and a small price to pay for greater certainty of investment in and quantifiable benefit for business investment in research and development.

We’ll be exploring the import of all other key changes in our upcoming blog posts including the introduction of a uniform clawback rule, as well as the proposed improvements to the administration, integration and transparency of the program.

Source: https://budget.gov.au/2020-21/content/factsheets/download/tax_fact-sheet.pdf

With the financial year almost over and the budget offering incentives, many businesses will be talking to their accountants about all things tax-related.

Questions might include:
– ‘What purchases should I make?’
– ‘Should I pre-pay rent?’
– ‘Am I going to make a profit or a loss?’

The answer to this last question will obviously inform whether the taxman is owed money or whether a refund is in the offing.

How your taxable position can change things.

In addition to all these bread and butter issues, more savvy business owners and accountants might also discuss R&D tax offsets. There are generous refunds on offer under the Federal Government’s R&D Tax Incentive program – up to 45% of eligible expenditure – but the level of refund very much depends on a company’s end-of-financial year taxable position. Hence the need for R&D to be factored into whole-of-business discussions before closing P&Ls.

What to be cautious of…

It is important that those inexperienced in R&D tax proceed with caution. There has been something of an explosion in R&D advisers and online solutions seeming to offer a fast track to claims and benefits. While it is true that the R&D tax program is relatively broad-based and can be self-assessed, activities must still be benchmarked against a legislative definition. Justification for a claim must also be defined and registered with the government. Furthermore, it is not unusual for claims to be scrutinised by bureaucrats long after registration has been confirmed.

How to set your business up for sustainable R&D claims.

There is a lot to be said for spending a little more time upfront thinking about how best to characterise project activities and articulate the arguments justifying the “experimental” nature of what has been done. In other words, get the right advice, set your business up for sustainable claims going forward and don’t treat the whole exercise as easy money for little or no effort.

Things to consider when registering your R&D Tax Incentive claim:

• Don’t register broad-based, generic or umbrella projects – that’s a sure way to attract a review from AusIndustry
• Articulate your hypothesis with an “If …then…” statement
• Make it clear that your new knowledge was not a transparent extension of the prior art

Some examples of things to consider on the cost side of your R&D claim:

• Startups – consider whether you paid yourself or how much should you pay yourself – considering other tax and super implications
• Has your business incurred R&D expenditure to an associate? If so, the expenditure must be paid prior to the end of the financial year in order to claim as an R&D tax offset in that year.
• And many more……..

Call us for a chat about maximising your benefits at tax time.

Today’s The Australian newspaper contains an interesting article penned by former Queensland Premier, Peter Beattie, questioning whether recent funding cuts to universities and research institutes is in the nation’s best interest.

A recent study has provided insight into how businesses view the R&D Tax Incentive, 2 years after its inception.

The Incentive offers an increased benefit to claimants compared to the previous scheme (the R&D Tax Concession).  Although the method of arriving at the Tax Incentive benefit is somewhat contorted when compared to the previous Tax Concession, the bottom line is that the benefit for companies with revenues of:

–       Under $20M & loss       = 45% cash rebate for every dollar spent on eligible R&D

–       Under $20M & profit     = 15% additional Net-Profit-After-Tax

–       More than $20M           = 10% additional Net-Profit-After-Tax (whether in profit/loss)

The study found that the biggest concerns held by companies in relation to claiming the Incentive centered around the new definitions of core/supporting activities and remaining within the parameters of required project definitions.

Interestingly, though unsurprisingly, almost half of those surveyed felt that, due to the ongoing iterations made to the legislation, the Tax Incentive was a benefit that could easily be scrapped. With innovative businesses uncertain by their very nature, it is disappointing that a scheme meant to bolster innovation may instead inhibit it, with 81% of companies concerned about lodging an application.

Encouragingly, over 70% of those surveyed engage a third party to complete their R&D Tax Incentive claim on their behalf. Although this indicates that indeed the Tax Incentive is more compliance-heavy than its Tax Concession predecessor, it also shows that businesses continue to recognise the solid benefits the scheme offers. Furthermore, this figure shows that claiming the Tax Incentive is not simply a financial exercise but requires technical insight and knowledge in how best to go about structuring and documenting a claim and the projects it encompasses.