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

April 29th, 2016 r&d tax incentive

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:

 

Prior to application of 2020 amendments to R&D tax offset rates
Refundable offset (turnover up to $20m) Non-refundable offset (turnover between $20m and $50m) Non-refundable offset (turnover greater than $50m)
R&D tax offset rate (FY20 and FY21) 43.5% 38.5% 38.5%
Corporate tax rate (FY20) 27.5% 27.5% 30%
Permanent R&D tax benefit (FY20) (R&D tax offset less tax rate) 16% 11% 8.5%
Corporate tax rate (FY21) 26% 26% 30%
Permanent R&D tax benefit (FY21) (R&D tax offset – tax rate) 17.5% 12.5% 8.5%
Cash refund when in tax loss (FY20 and FY21) 43.5% Nil – offset carried forward Nil – offset carried forward

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.

 

Including application of 2020 amendments – FY22 onwards
Refundable offset (turnover up to $20m) Non-refundable offset (turnover greater than $20m) up to 2% intensity Non-refundable offset (turnover greater than $20m) beyond 2% intensity
R&D tax offset rate (FY22) 43.5% (25% + 18.5%) 33.5% (25% + 8.5%) or 38.5.% (30% + 8.5%) 41.5% (25% +16.5%) or 46.5% (30% +16.5%)
Corporate tax rate (FY22) 25% 25% or 30% for turnover greater than $50m 25% or 30% for turnover greater than $50m
Permanent R&D tax benefit (R&D tax offset less tax rate) (FY22) 18.5% 8.5% 16.5%
Cash refund when in tax loss 43.5% Nil – offset carried forward Nil – offset carried forward

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.

 

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