Many would know that the Australian Government has been pursuing changes to the R&D Tax Incentive program, which were expected to save $1.8bn if implemented. These changes have been bogged down in a Senate committee review for some considerable time, with the reporting deadline constantly being pushed back.
As part of the 2020/2021 budget, the Government has abandoned the proposed changes (which ironically was presented as an ‘increase’ in R&D spending of $2bn). This is a very good thing for R&D in Australia.
What has changed
There will still be changes however, but they are largely for the better. The changes are a little complex, as explained below.
The first change is that the start date for the changes has been pushed back to 1st July 2021. There is no prospect of ‘clawback’ from companies that have already submitted their FY2020 R&DTI application.
For companies which have an aggregated turnover of less than $20 million, the refundable R&D tax offset will be the company tax rate plus 18.5 percentage points. Also, the proposed cap of $4m for these companies has been scrapped. Note that the small company tax rate however is also changing. There is no change for FY2020 (the financial year just finished), but the small company tax rate will decrease to 26.0% for FY2021, and to 25.0% for FY2022. For small companies utilising the R&DTI scheme, there is no change to the effective R&DTI benefit, since the changes don’t start until the FY2022 financial year.
So, in summary there is no effectively change for small companies. Of course, the decrease in the small company tax rate will of course have other benefits. As with the current R&DTI scheme, companies with an aggregated turnover of less than $20 million will receive a cash refund if their R&DTI benefit exceeds their current tax liability.
Note that ‘small company’ for taxation purposes is defined as companies with an aggregated turnover of less than $50m, which is different to the R&DTI criteria. Hence, companies with an aggregated turnover of between $20m and $50m are is a special category – they are small companies for the purposes of calculating the company tax rate, bur large companies for the R&DTI scheme. Hence, the R&DTI benefit for these companies will be (after 1st July 2021) 25% + either 8.5% or 16.5% depending on the intensity measure as described below. So companies which ‘trip over’ the $20m threshold will see their R&DTI benefit drop from 43.5% to 41.5%, but that has not changed.
For companies which have an aggregated turnover of $20 million or more, there will still be a two-tiered ‘intensity’ premium (the proposal in the previous bill was for 3 levels) that rewards companies which a higher proportional spend on R&D. The two rates are the company tax rate plus:
- 8.5 percentage points for R&D expenditure up to 2 per cent R&D intensity
- 16.5 percentage points for R&D expenditure above 2 per cent R&D intensity
The R&D expenditure threshold will be increased from $100 million to $150 million per year as planned. So, companies that spend significant sums on R&D in Australia (> 2% of turnover) will be the big winners after 1st July 2021.
Interestingly, the Government intends to improve the transparency of the program by publishing R&D claims. It isn’t clear at the moment exactly what will be published.
Unsurprisingly, there will also be a greater focus on enforcement, so expect more in the way of reviews of R&D Tax Incentive applications. For those claimants who are diligent about their applications and use a competent R&D Tax Incentive consultant, there is little to be worried about.
Conversely, if you are concerned about the eligibility of your claim, now might be a good time to review the service you are getting from your current R&D Tax Incentive consultant. The rate of reviews has been modest in recent years, so this rate may well increase. It would be reasonable to assume that the Government may look for other ways (such as more focus on reviews) of pegging back the cost of the R&D Tax Incentive, but time will tell.
The Tech Abstract commitment
The announced changes should not affect clients of Tech Abstract. Any increase in enforcement activities for the R&D Tax Incentive should be of little concern to our clients, as Tech Abstract only prepares and submits completely compliant R&D Tax Incentive applications that describe 100% eligible R&D.
Tech Abstract will happily defend any application we submit in a subsequent review by AusIndustry or the Australian Taxation Office.