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:
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:
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:
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:
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.