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.