R&D Tax Incentive Reforms Back on the Parliamentary Agenda

R&D Tax Incentive Reforms Back on the Parliamentary Agenda

Just when we thought that the R&D tax reforms proposed by the Federal Coalition Government in its 2018 Budget were well and truly dead and buried they have been resurrected and reintroduced into Parliament – on the last sitting day of 2019 to boot!

You might recall that back in 2018 the Coalition proclaimed that the reforms were aimed at:

  1. improving the integrity of the system
  2. continuing the support of the start-up end of the R&D spectrum; and
  3. refocusing support for larger companies with greater rewards for companies undertaking higher-intensity R&D.

To the Coalition’s great frustration, a fractious Senate put these proposed reforms to the sword back in the day but it seems the government has kept them well and truly up its sleeve and in “original condition” for they have been reintroduced almost unchanged.

Clearly the government fancies its chances of getting them passed into law this time around but will nevertheless still have to prosecute its arguments when the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 gets debated upon Parliament’s resumption in February next year. Should the legislation pass it will apply to income years commencing on or after 1 July 2019.

To refresh everyone’s memory, here follows a comparison of how the proposed law differs to the current law:

R&D entities with aggregated turnover in excess of $20M

Current Law

Non-refundable R&D tax offset at a rate of 38.5%, equivalent to 8.5% effective tax saving.

Proposed Law

Non-Refundable R&D Tax Offset rate to be tiered depending upon the R&D entity’s “R&D intensity”. This “R&D intensity” is defined as the proportion of the R&D entity’s total business expenditure (as per Item 6 of the company income tax return) spent on eligible R&D expenditure in the income year (i.e. the R&D claim).

The tiers and the applicable Non-Refundable R&D Tax Offset rate are as follows:

Tier R&D intensity range   Intensity premium
1 R&D claim that is up to and equal to 4% of total company expenses 4.5%
2 R&D claim is between 4% – 9% of the total company expenses 8.5%
3 R&D claim is greater than 9% of the total company expenses 12.5%

 In what can be seen as somewhat of a concession, the Government has proposed that the $100M R&D expenditure cap be increased to $150M.

R&D entities with aggregated turnover less than $20M

Current Law

Refundable R&D Tax Offset rate at 43.5%.

Proposed Law

The Refundable R&D Tax Offset rate will be fixed at 13.5% over and above the corporate tax rate. The amount of any R&D tax refund will capped at $4M per annual (except for clinical trials).

Other changes:

There are some other changes that have been proposed in the Bill around claw back rules and balancing adjustments and the manner in which the program is being administered. We will tackle these at greater length in the upcoming blogs.

What Can We Say

As a long-standing adviser in R&D tax and a passionate advocate for a broad based and generous Government R&D incentive scheme for the nation, we are obviously disappointed to see the reforms reintroduced. In the context of a regulatory environment that is demonstrably and increasingly harsh, we fear these changes will only further discourage local R&D investment by introducing complexity (at the non-refundable end, where the benefit is marginal at best to begin with) and a measure of discrimination (at the refundable end with the carving out of clinical trials only from the $4M cap).

It is hard for us to see these changes as otherwise especially given the Government forecasts that they will deliver savings in excess of $4B to the budget bottom line.