Innovation is crucial to both new and established businesses and consideration of the R&D tax incentive is not only relevant to start-up and information technology companies, but should also be considered on an ongoing basis for established businesses doing things better to be more productive and to stay competitive.
However, businesses that are claiming against R&D expenditure should be aware of recent changes to the R&D tax incentive.
Rates of tax offsets
From 1 July 2016, the rate of tax offsets available under the R&D tax incentive for the first $100 million of eligible expenditure was reduced by 1.5 per cent.
The refundable rate (for eligible business with a turnover less than $20 million) was reduced from 45 per cent to 43.5 per cent. The non-refundable rate (other eligible entities) reduced from 40 per cent to 38.5 per cent.
R&D tax incentive review
The review panel set up by the prime minister last year has now made six recommendations aimed at improving the performance of the R&D tax incentive program and enabling its long-term continuation:
1. Retain the current definition of eligible activities and expenses under the law, but develop new guidance, including plain English summaries, case studies and public rulings, to give greater clarity to the scope of eligible activities and expenses.
2. Introduce a collaboration premium of up to 20 per cent for the non-refundable tax offset to provide additional support for the collaborative element of R&D expenditures undertaken with publicly-funded research organisations. The premium would also apply to the cost of employing STEM PhD or equivalent graduates in their first three years of employment. If an R&D intensity threshold is introduced, companies falling below the threshold should still be able to access both elements of the collaboration premium.
3. Introduce a cap in the order of $2 million on the annual cash refund payable under the R&D tax incentive, with remaining offsets to be treated as a non-refundable tax offset carried forward for use against future taxable income.
4. Introduce an intensity threshold for recipients of the non-refundable component of the R&D tax incentive, such that only R&D expenditure in excess of the threshold attracts a benefit.
5. If an R&D intensity threshold is introduced, increase the expenditure threshold to $200 million so that large R&D-intensive companies retain an incentive to increase R&D in Australia.
6. That the government investigate options for improving the administration of the R&D tax incentive (e.g. adopting a single application process; developing a single programme database; reviewing the two-agency delivery model; and streamlining compliance review and findings processes) and additional resourcing to implement such enhancements. To improve transparency, the government should also publish the names of companies claiming the R&D tax incentive and the amounts of R&D expenditure claimed.
Daryl Jones is a senior consultant at HLB Mann Judd Brisbane.