Changes to the R&D Tax Legislation

Posted on April 15th, 2015 by Martin Reed

What is the R & D Tax Incentive program?

The R & D Tax Incentive is a broad-based program for eligible companies who engage in Research and Development activities. It has been set up to boost the competitiveness, productivity and cash flow for innovative businesses, with over 10,000 applicants per annum in Australia. It is jointly administered by AusIndustry and the ATO. Insight Business are specialist R & D Tax Agents and work only in this area.

Under the current legislation, for companies turning over less than $20,000,000 they receive a tax incentive of 45% of their eligible expenditure if they are in a loss which is received as a direct payment, or 15% if they are in a profit as a tax credit. For companies turning over more than $20,000,000, they receive a tax incentive of 40% of their eligible expenditure if they are in a loss, or 10% if they are in a profit. In this second scenario, both payments are received as a tax credit.

Major changes

The R & D tax legislation was changed three years ago, and has a number of important differences to the previous R & D legislation. I see these as positive steps to make it more accessible and applicable to genuinely innovative companies and to encourage participation by overseas companies.

More generous benefits

There is a greater onus on reviewing applicants’ record-keeping. Rather than this being a negative, it provides an educational role for AusIndustry to assist applicants. The Mount Owen case, in which the Administrative Appeals Tribunal positioned that the applicant did not keep adequate records or have a clear hypothesis is a landmark case for the definition of what constitutes R & D. The new emphasis encourages companies to run their R & D programs in a prudent and effective manner, which gives better ROI for both applicants and taxpayers as a whole.

A more targeted definition of eligible R & D, which eliminates some of the confusion – and the potential for unscrupulous applicants to ‘gild the lily’- frees up more benefits for worthy companies.

Another change, which is particularly helpful for companies looking to secure private or public capital – is that domestic R & D expenses, overseas R & D and particular technology acquired for R & D activities can be applied for and accepted three years in advance.

Recent changes

There has been a lot of activity in terms of changes from both AusIndustry and the ATO by the new federal government. The recent changes, (as recent as February 9th 2015) can be summarised as follows;

The Tax Laws Amendment (Research and Development) Bill 2013 returned to the Senate for the second reading debate and passed in the affirmative, by 34 votes to 31. This approved two changes;

The first is to replace the $20 billion turnover threshold with a $100 million R & D annual spending cap. This is a positive outcome compared to what was originally proposed. The original bill would have excluded 15 to 20 of Australia’s largest companies from accessing the R & D tax incentive. Nothing exists in a vacuum; taking money away from the rich companies would have also caused a downstream effect to those smaller players, who work for and contribute to the larger entities. This amendment is fairer and more equitable than the original proposal.

On March 3rd the senate voted on the Tax & Superannuation Laws (2014 Measures No. 5) Bill 2014 which included a proposal to introduce an across-the-board cut of 1.5% to the company tax rate. It was proposed that the R&D Tax Offset Rates of 45% (companies under $20 million turnover) and 40% (companies over $20 million turnover) were ‘normalised’ to be decreased by 1.5 basis points also. This was contained in Schedule 3 of the Bill. The Opposition and Australian Greens proposed an amendment to this to omit this Schedule which was supported. So in great news for the Australian innovation community, the R&D Tax Incentive offset rates will remain unchanged at 40% and 45% for large and small claimants respectively. So it is ‘business as usual’.

R & D Productivity

There is a clear and direct relationship between industry productivity and the R & D Tax benefits of that country. The R & D program is prevalent in most OECD countries. Australia has an international reputation as having one of the world’s best R & D programs.

Larger businesses may be able to dedicate more time and resources to R & D to introduce new products as well as improve existing ones. However, smaller businesses can elevate their value proposition by offering innovative products and services.

The benefits of R & D are often long-term and far-reaching; it is important to remember that an investment in R & D may not yield solely short-term profits. Innovation is essential to productivity growth but it does not just happen. Successful, well-planned R & D leads to innovation, and successful innovation leads to improved financial performance. This is why the R & D Tax Incentive program plays such a pivotal role in helping the gamut of innovative companies, from the start-up trying to ‘cross the chasm’ to get to a commercial level, to multi-million dollar R & D programs.

In my view – and one shared by many others – innovation is the new global currency. In order to continue to compete on an international stage, innovation is becoming more and more important for Australia. For many years, we have actually been punching well above our weight in this area and the future holds even more promise for Australia to be recognised not just as having performed well during challenging global times but also to make a significant contribution to global innovation.