R&D tax incentive changes: Better focus, or misguided?

by Simon Dorevitch

Proposed changes to the research and development (R&D) tax incentive are the most significant to the incentive since it replaced the R&D tax concession in 2011.

The bill containing these changes is named the Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018, (here’s a link to it), with the bill containing other measures than reform to the R&D tax incentive, such as changes to thin capitalisation and online hotel bookings.

An eligible R&D entity must undertake at least one “core activity”. Excluded activities include market research, exploring for minerals or petroleum, management studies and research in social sciences and humanities, among other things.

The benefit received for incurring eligible expenditure on R&D activities depends on the aggregated turnover of the R&D entity. Entities with an aggregated turnover of less than $20 million currently receive a refundable tax offset of 43.5% of eligible R&D expenditure, while entities with an aggregated turnover of $20 million or more receive a non-refundable tax offset of 38.5%.

The changes
Under the proposed changes, the refundable offset will be pegged at 13.5% more than the entity’s corporate tax rate. Therefore, if there are changes in the corporate tax rate, the rate of the offset will automatically be updated.

The corporate tax rate applying to a “base rate entity” is currently 27.5%. The refundable offset rate for these entities will therefore be 41%.

The non-refundable offset for R&D entities with an aggregated turnover of $20 million or more will be determined by reference to the entity’s R&D intensity – broadly, the proportion of notional R&D deductions to total expenditure (as reported in item 6 of the company’s tax return).

The proposed rates are:

  • Up to 2%, 34% (i.e. an intensity premium of 4%)
  • Between 2% and 5%, 36.5% (i.e. an intensity premium of 6.5%)
  • Between 5% and 10%, 39% (i.e. an intensity premium of 9%)
  • Greater than 10%, 42.5% (i.e. an intensity premium of 12.5%)

The bill introduces a $4 million annual cap on cash refunds for companies with an aggregated turnover of less than $20 million. An exception is R&D activities that form part of a clinical trial. Any excess offset is treated as a non-refundable tax offset and carried forward to future income years.


More information and essential details can be found in the full version of this article, which appears in the November issue of The Taxpayer magazine. Tax & Super Australia members receive this magazine as a member benefit. To find out more about joining Tax & Super Australia as a member, click here.

Also listen to the Tax Wrap podcast episode 178 below for more details on the changes to the R&D tax incentive.