In the first week of December 2019, the government reintroduced legislation to reform the R&D Tax Incentive (the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019, which can be found here along with its Explanatory Memorandum).
A previous attempt to reform R&D concessions never made it through the Senate, perhaps due to these being bundled in with other reforms (in a bill named Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018), targeting other measures such as thin capitalisation and online hotel bookings. A senate committee recommended further consideration on the R&D aspects of that bill, especially with respect to a proposed “intensity” threshold and refundable offset cap.
The latest proposal to reform the R&D Tax Incentive (R&DTI) continues along lines similar to those previously proposed, with some new features such as “intensity-based” tax offset premiums (see below, and also see from page 13 of the bill). Also the expenditure threshold has increased from $100 million to $150 million.
In announcing the new bill, Treasurer Josh Frydenberg says “companies with an annual turnover below $20 million will receive a 13.5 percentage point premium above their tax rate to support their R&D. These companies will also have their cash refunds capped at $4 million per annum (with expenditure towards clinical trials excluded from the cap)” — which he says is twice the amount recommended in the review of the previous R&DTI.
- As noted by the Treasurer, for companies claiming the refundable offset with a turnover less than $20 million, instead of a fixed 43.5% R&D offset rate, the rate will be calculated based on a company’s tax rate plus 13.5%, capped at $4 million per year;
- For companies claiming the non-refundable offset with a turnover greater than $20 million, instead of a fixed 38.5% R&D offset, the rate will be calculated based on a progressive scale determined by a company’s “R&D Intensity”. Intensity is defined as R&D expenditure as a proportion of the total business expenditure, and scaled as follows:
- Offset rate for expenditure up to 0-4% intensity — tax rate + 4.5%;
- Offset rate for expenditure up to 4-9% intensity — tax rate + 8.5%;
- Offset rate for expenditure more than 9% intensity — tax rate + 12.5%;
- The current cap on claimable R&D expenditure increases from $100 million to $150 million;
- Changes will apply to the mechanisms for R&D feedstock, clawback and R&D asset balancing adjustments;
- The ATO is to publicly disclose claimant information, including the amount of expenditure claimed;
- Limits will apply on time extensions to complete R&D registrations.
The amendments in the bill generally apply from 1 July 2019. The proposed changes however are not yet law and are to be debated by both houses of Parliament in the new year.
Note that the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) Kate Carnell has recommended a range of reforms to the R&DTI as it stands.
The ASBFEO report makes 24 detailed recommendations in relation to the following key themes:
- where compliance examinations or audits are necessary, they should take place as close as possible to the first year of registration of a project
- guidance material needs to be comprehensive, clearer and up-to-date and developed in consultation with small business
- agency record keeping requirements be simplified and take into account commercial practicality for a small business
- small business must be assisted to help identify and retain professional and responsible R&D consultants.