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How the R&D Tax Incentive Tax Offset Works, Interaction with Tax Position and Summary of Changes:

The R&D tax incentive operating from FY12 entitles companies to tax offsets for eligible expenditure on registered R&D activities, in exchange for tax deductions on the expenditure.

The Incentive introduced the concept of a notional deduction, since eligible expenditure notionally determines R&D tax offsets, but any entitlement to a tax deduction is foregone. The forfeiture of tax deductions for R&D expenditure is made at item 7, label D (addback of non-capitalised R&D expenditure) in the company tax return.

Prior the 2020 amendments (up to, and including FY21) the legislated offsets were:

• R&D entities with aggregate turnover less than $20m: 43.5% refundable R&D tax offset; and
• R&D entities with aggregate turnover greater than $20m or that are controlled by exempt entities: 38.5% non-refundable R&D tax offset.

The permanent R&D tax benefit (incentive) received for eligible expenditure is the difference between the tax effect of general tax deductions forfeited and the R&D tax offset entitlement.

The permanent R&D tax benefit legislated prior to the 2020 amendments (in FY21) was:

• R&D entities with aggregate turnover less than $20m: 17.5% permanent benefit (43.5% refundable R&D tax offset less 26% corporate tax rate);
• R&D entities with aggregate turnover between $20m and $50m or that are controlled by exempt entities: 12.5% permanent benefit (38.5% tax offset less 26% corporate tax rate); and
• R&D entities with aggregate turnover greater than $50m or that are controlled by exempt entities: 8.5% permanent benefit (38.5% tax offset less 30% corporate tax rate).

As corporate tax rates reduce for base rate entities between FY20 and FY21, the permanent R&D tax benefit increases, given the R&D tax offset rates are fixed, as outlined below:

Changes to calculation of R&D tax offsets:

Under the 2020 amendments from FY22, there is no change to eligible R&D activities and expenditure. Changes from the 2020 amendments impact upon:

• determination of R&D tax offset rates;
• adjustments to R&D tax offsets in cases of recoupment;
• mechanisms for recognising balancing adjustments on R&D assets; and
• administrative processes to enhance integrity and transparency.

The 2020 amendments link R&D tax offset rates to corporate tax rates, now determined based on a fixed margin over tax rates (as opposed to fixed R&D tax offset rates existing previously).

From FY22, the legislated R&D tax offsets are:

• R&D entities with aggregate turnover less than $20m:
  • refundable R&D tax offsets of 18.5% above corporate tax rate; and
• R&D entities with aggregate turnover greater than $20m or that are controlled by exempt entities:
  • non-refundable R&D offset is based on an ascending scale linked to “intensity”:
• 5% above corporate tax rate for R&D expenditure up to 2% intensity; and
• 5% above corporate tax rate for R&D expenditure above 2% intensity.

Further information about the R&D Tax Incentive is available on the ATO website. If you have any questions about the incentive in relation to your company, please contact one our R&D tax specialists at Swanson Reed. You can also find out whether your company qualifies for the R&D Tax Incentive by completing our quick, online R&D eligibility quiz.