Changes to the Research and Development Tax Incentive are intended to retrospectively apply from 1 July 2019, with the proposed measures reintroduced set to amend the available tax offset rates.
The changes were particularly unpopular within the tech industry, with Adrian Griffin of Perth-based Lithium Australia suggesting the fate of the country’s burgeoning lithium industry and others like it could be at stake if they were to become law.
Under the government’s proposal, entities with aggregate turnover of less than $20 million will see the corporate tax rate (currently 27.5 per cent) plus a 13.5 per cent incentive component, refundable up to a cap of $4 million (excluding clinical trial costs).
Meanwhile, for entities with aggregate turnover greater than $20 million, this will see the corporate tax rate, plus a tiered incentive component, applied incrementally.
“By way of example, a company with $1 million in R&D expenditure and $10 million of total expenditure will have an intensity rate of 10 per cent,” the government noted.
“It will be entitled to a 4.5 per cent incentive component on the first $400k of R&D expenditure, 8.5 per cent on the next $500k of R&D expenditure and 12.5 per cent on the last $100k of R&D expenditure. Accordingly, its net total benefit will be $73,000 or 7.3 per cent of R&D expenditure.”
Other changes noted by the government include:
- increasing the R&D expenditure threshold from $100 million to $150 million.
- adjusting the treatment of feedstock input expenditure and government recoupments through additional assessable income, to claw back the incentive component associated with these aspects of an R&D Tax Incentive claim.
- increasing Innovation and Science Australia’s ability to make binding determinations about its application of the program.
Budget savings v business investment
Accounting firm BDO remains highly critical of the planned changes, which it suggested were aimed more at its political promise for a budget surplus ahead of the needs of industry.
“It is disappointing to see the government has not followed the advice of the Senate committee in reconsidering the $4 million cap on the refundable component of the tax offset, and the intensity measures applied to non-refundable offsets,” it said in response to the proposed changes.
“By the government’s own estimates, this will result in $1.8 billion being returned to the budget, rather than invest[ed] in Australian business over the foreseeable forward estimates.”
However, Treasurer Josh Frydenberg told Parliament that the government “is committed to backing R&D in Australia and the economic opportunities and jobs it creates”.
He said the proposed reforms “will ensure that the tax incentive remains an effective and sustainable part of Australia’s overall support for R&D”, and deliver on the government’s pledge in the 2018–19 budget.
R&D Incentive plagued by difficulties
Renewed interest in reforming the eligibility and structure of the R&D Tax Incentive comes after criticism from the business community about the ATO clawing back funds, often years after they were obtained, and threatening existing jobs as well as innovation needed to create new ones.
Even ATO Commissioner Chris Jordan admitted earlier this year that the tax incentive “has been a problematic area for a number of years”, and that unlike Australia, other countries have opted to “go through the direct grant route rather than the tax route”.
The ASBFEO announced in late August that it would scrutinise these clawbacks. My Business understands that its report on the matter will be handed down before Christmas.