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Industry Examples of Refundable R&D Tax Offset Eligibility Cliff for Companies Breaching $20M Turnover Threshold

Australia’s R&D Tax Incentive program is designed to encourage innovation by providing tax refunds to eligible companies based on their R&D spending. However, companies face a refund cliff if their revenue exceeds the legislated turnover threshold.

A company’s rate of R&D tax offset and whether it is refundable or not depends primarily on the R&D entity’s aggregated turnover:

• If an entity’s aggregated turnover is less than $20 million and it is not controlled by any exempt entities, then the company can claim the refundable tax offset.
  • The refundable tax offset rate is equal to the company’s corporate tax rate plus an additional premium rate of 18.5%.
• If an entity’s aggregated turnover is $20 million or more, or it is controlled by exempt entities, then the company can claim the non-refundable tax offset.
  • The non-refundable tax offset rate is equal to the company’s corporate tax rate plus an additional premium rate of 8.5% or 16.5% depending on R&D Intensity.

A series of rules apply to groups and include turnover of entities deemed connected or affiliated, and also for the determination of which transactions are included as turnover.

The original rationale for having a two-tiered system is probably (and fairly) that:

• Small companies require a greater level of support for their R&D Activity than larger entities;
• Small companies require cash refundability of R&D Tax Offsets (in exchange for forgone future tax losses) as they require precious capital to fund future operations or ongoing R&D activity in their early or pre-revenue stages. Whereas larger companies do not require the cash refundability to the same extent, since they have aggregated turnover in excess of $20 million and could fund their R&D activities from their established commercial operations.

Last year, Swanson Reed highlighted that this threshold may need to be reviewed as we have anecdotally noticed many companies now slightly breach the $20 million threshold from growth and possibly the high inflation environment, rendering them no longer eligible for the Refundable R&D Tax Offset.

These thresholds were established at the outset of the R&DTI program in FY12, which critics may now argue are outdated, as inflation and growth as policy definitions of a “small business” in FY12 are extremely different to that in FY23.

Notably, the $20 million turnover threshold has not changed or increased during this time, some 14 years ago.

Recent industry publications (in AU Manufacturing), have highlighted how these thresholds are impacting some of Australia’s greatest innovators such as:

• Gilmour Space Technologies, who develop technology to launch rockets into space: With revenues now at $59 million, Gilmour has soared beyond the $20 million mark and are now only entitled to a non-refundable tax offset;
• Micro-X-Ltd is an Australian based award winning ASX listed X-ray technology company specialising in revolutionary medical and security imaging products: the company’s approaching breach of the $20 million threshold had Micro-X left in uncertain budget positions, even though they received a $3.31 million R&DTI in FY22. In the company’s financial results and operational update for the half year ended 31 December 2023, investors were informed that “At this point in time it is uncertain that the ‘less than $20 million’ revenue threshold will be achieved (in FY23), and the company has therefore taken the conservative position that its eligible R&D incentive be disclosed as a tax loss offset rather than a cash receivable.”

Where to from here and SR Proposals?

Whilst the growth of such companies should be celebrated, and can in cases be partly attributed to their use of the R&DTI as a capital source, going suddenly from a refundable R&D tax offset to a non-refundable tax offset can present an abrupt financing crunch.

Some also may argue that this threshold counteracts the programs encouragement of continued innovation, research, development and risk-taking, particularly when the determining factor is a company’s size.

This issue may need to be addressed or scaled. Possible options include:

• Rethinking the threshold: The $20 million turnover threshold was established over a decade ago. Inflation and growth have rendered it outdated. Why not extend it to an increased amount, say $25 million, to account for inflation and encourage sustained innovation?
• Alternative approaches: Could the existing threshold logic be entirely overturned? Would determining this number based on CPI and linked back to the original commencement of the R&DTI better align the incentive policies to company’s innovation?

Overall, innovation should be fostered within Australia’s R&DTI ecosystem, regardless of a company’s size or revenue. Whilst we generally advocate for stability in the R&D Tax Incentive, and we agree it’s not sustainable to provide generous refundable offsets to larger companies, the 14 year turnover threshold is now appearing dated and should be reviewed.

Please get in touch with our office if you require assistance, would like to speak to someone about a potential claim, or check out our website for more information.