Reintroduction of legislation to reform R&D Tax Incentive

December 5th, 2019 reform R&D Tax Incentive

The federal government has today reintroduced legislation to reform the R&D Tax Incentive (Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019) which is detailed here.

The previous bill attempting to reform the R&D Tax Incentive did not pass through the Senate, and a Senate Economics Legislation Committee recommended that the bill should be deferred from consideration until further analysis of the bill’s impact is undertaken, particularly with respect to concerns around the proposed intensity threshold and refundable offset cap.

Based on an initial review of the latest bill, the proposed reforms are similar to those previously proposed, with some minor adjustments to the intensity threshold ranges.

A summary of the key changes proposed within the latest bill are as follows:

  • Changes are noted in the Treasurer’s press release as seeking to better target the R&D Tax Incentive, and to ensure its ongoing sustainability.
  • Proposed changes apply for financial years commencing on or after 1 July 2019 (FY20).
  • For companies claiming the refundable offset with a turnover less than $20 million, instead of a fixed 43.5% R&D Offset rate, the rate will be calculated based on a company’s tax rate plus 13.5%, capped at $4 million;
  • For companies claiming the non-refundable offset with a turnover greater than $20 million, instead of a fixed 38.5% R&D Offset, the rate will be calculated based on a progressive scale determined by a company’s ‘R&D Intensity’. Intensity is defined as R&D expenditure as a proportion of the total business expenditure, and scaled as follows:

o   Offset rate for Company R&D Expenditure up to 0-4% Intensity = Tax rate + 4.5%;

o   Offset rate for Company R&D Expenditure up to 4-9% Intensity = Tax rate + 8.5%;

o   Offset rate for Company R&D Expenditure in excess of 9%+ Intensity = Tax rate + 12.5%;

  • The current cap on claimable R&D expenditure increases from $100 million to $150 million;
  • Changes will apply to the mechanisms for R&D Feedstock, Clawback and R&D Asset balancing adjustments;
  • ATO to publicly disclose claimant information, including the amount of expenditure claimed;
  • Limits will apply on time extensions to complete R&D Registrations;

We note from an initial review of the latest bill that concerns will remain around the complexity of proposed changes, particularly with respect to the intensity threshold, as:

  • A company’s rate of R&D Incentive becomes unclear at the time of an investment decision, given that “total business expenditure” cannot be clearly determined until after a company’s financial year end; and
  • The intensity threshold may reduce the relative R&D Offset available to companies with high cost bases, such as those with local manufacturing operations.

It is also disappointing that the reintroduction of the reforms follow recent pleadings for stability to the R&D Tax Incentive by the business community, including leading Australian companies such as CSL, Cochlear, Atlassian and Dulux group.

The proposed changes are however not yet law and must first pass through both houses of parliament before they are enacted as legal changes to the R&D Incentive.

Please get in touch with us if you have any questions.

Source: Australian Treasury

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