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Federal Budget Update – R&D Tax Incentive a Winner

Federal budgets under both major parties have not presented good news for the R&D Tax Incentive in recent years, with the flagship programme for encouraging business investment in R&D subjected to a series of proposed cuts via caps and rate reductions.

This year’s budget has been a welcome change in the wake of the Government’s plan for COVID economic recovery.

As was flagged by the media last week, the government has largely backed away from the unworkable changes in its R&D Tax Incentive reform bill that was before the senate, and presented additional R&D Tax benefits not previously anticipated.

The proposed budget reform measures have been replaced by alternate changes, which appear to provide greater level of incentive for companies to undertake R&D.

A summary of the budget announcement is below:

• The previous reform proposed to apply for FY20 will not be pursued, and there will be no change to companies’ R&D Tax Offset entitlement for the FY20 OR FY21 periods;
• A new reform to calculating R&D Tax Offsets will apply from 1 July 2021 for FY22, whereby:
  • For companies claiming the Refundable R&D Tax Offset (Aggregate turnover less than $20M):
    • The R&D Tax offset rate, currently fixed @ 43.5% will instead be based on a rate of 18.5% above a company’s tax rate. The company tax rate for FY22 is scheduled to be 25% for these companies, meaning the corresponding R&D Tax Offset rate in FY22 would be 43.5%, same as the current rate;
    • There will be no cap on the amount of Refundable R&D Tax Offset a company can claim;

• • For companies claiming the Non-Refundable R&D Tax Offset (Aggregate turnover greater than $20M):
    • The R&D Tax offset rate will be based on two tiers, determined by reference to a company’s R&D Expenditure as a proportion of total business expenditure for the year:
      • Companies spending between 0% and 2% of their total expenditure on R&D will be able to claim 8.5% over their company tax rate. This represents the same base level of R&D Tax benefit currently available to most large companies;
      • Companies spending more than 2% of their total expenditure on R&D will be able to claim 16.5% over their company tax rate. This represents a significant increase in R&D Tax benefit for relevant companies;
    • The annual cap on eligible R&D Expenditure will increase from $100 million to $150 million;

Companies claiming the Refundable R&D Tax Offset who apply the loss carry back provisions will also need to be mindful of potential implications to the net R&D Tax offset derived from their claims.

The headline proposals are encouraging, and a welcome change to what was previously before the Senate. The government has also flagged changes to the administration, integrity and transparency of the R&D Tax Incentive, and the relevant detail underlying these elements will need to be examined in due course.

Just as the Government was widely criticised for pursuing the R&D Tax budget reforms, they should be commended for seeing reason and shifting position.

Parties that have lobbied the Government on the flaws of the previously proposed reforms should also be commended.

Once these proposals are introduced, we call on both sides of politics to commit to a stable R&D Tax Incentive and cease the persistent policy shifts and proposed changes.