The 2018 Federal Budget has announced a series of changes to the R&D Tax Incentive that are intended to come into effect on 1 July 2018…
On 8 May 2018, the Treasurer, the Hon Scott Morrison MP, announced changes to the R&D Tax Incentive, as part of the Federal Budget 2018-19.
The changes respond to the findings of the 2016 Review of the R&D Tax Incentive. The Review found that the cost of the incentive has grown significantly and questioned how well it was meeting its objectives.
The Government is reforming the R&D Tax Incentive to reward additional investment in R&D while also ensuring the integrity and affordability of the R&DTI.
The main announcements are as follows:
Refundable R&D Tax Offset
- The level of support available will be the claimant’s tax rate for the year plus 13.5 percentage points.
In addition, the Government will, from 1 July 2018:
- Introduce a $4 million annual cap on cash refunds for R&D claimants with aggregated annual turnover less than $20 million. Amounts that are in excess of the cap will become a non-refundable tax offset and can be carried forward into future income years;
- Exclude R&D tax offsets for clinical trials from the $4 million cap on cash refunds, recognising the critical role of R&D expenditure on clinical trials in developing life changing drugs and devices; and
- Amend the refundable R&D tax offset so it is a premium of 13.5 percentage points above the claimant’s company tax rate for that year.
Non-Refundable R&D Tax Offset
The Government has introduced a tiered scheme of support based on an organisation’s R&D intensity.
The level of support available will be the claimant’s tax rate for the year, plus:
- 4 percentage points for R&D expenditure between 0 per cent and 2 per cent R&D intensity (inclusive);
- 5 percentage points for R&D expenditure above 2 per cent to 5 per cent R&D intensity (i.e. not including R&D expenditure falling within the first 2 per cent of the claimant’s total expenses for the year);
- 9 percentage points for R&D expenditure above 5 per cent to 10 per cent R&D intensity (i.e. not including R&D expenditure falling within the first 5 per cent of the claimant’s total expenses for the year); and
- 5 percentage points for R&D expenditure above 10 per cent R&D intensity (i.e. not including R&D expenditure falling within the first 10 per cent of the claimant’s total expenses for the year).
The main measures announced are as follows:
- Integrity – strengthening anti-avoidance rules in the tax law so the ATO can ensure taxpayers do not avoid paying their fair share of tax by using tax schemes involving the program; Enforcement: additional resourcing so the Government can help ensure that ineligible R&D claims are denied;
- Transparency – publishing company names claiming the R&DTI and the amounts of R&D expenditure they have claimed, to improve public accountability for R&D claimants;
- Guidance – enabling Innovation and Science Australia to produce public findings similar to the ATO, and provide more effective, binding guidance on the scope of what is eligible R&D. This will help ensure taxpayers do not unintentionally misinterpret the meaning of the law; and
- Administration – imposing a three-month limit on extensions of time available from when applications, registrations and reviews are due.
What does this mean for a typical startup?
There’s no doubt that for many years the R&D Tax scheme has been an important source of funds early state ventures in Australia. It was (and is) designed to reward innovative companies for their genuine R&D efforts, helping to build an innovative economy and all that this involves.
Therefore, any changes to it can cause some attention. The annual cap of $4M back is not aimed at startups. You’d have to be spending almost $10M in eligible R&D a year for this to kick in. Plus it excludes clinical trials from the cap.
The immediate implication for startups claiming R&DTI may be that instead of claiming 43.5% of eligible R&D spend back, it may be 41%. Not a huge change, you could argue.
Another point to note is that there is more money available for the authorities to scrutinise the eligibility of the R&D claims, so startups should certainly be sensible and claim only what they should (which has always been the case). ‘Have all your ducks in a row’ would be good advice.
For more information on the announced R&D Tax Incentive changes, please refer to the Budget.gov website and please go seek your own independent financial and accounting advice on these matters.