Federal Budget boosts the benefit for R&D Tax Incentive claimants

29 October 2020

In brief

The legislation to give effect to the 2020-21 Federal Budget measures to reform the research and development (R&D) tax incentive has now been enacted and set to apply to income years commencing on or after 1 July 2021. These measures represent an increase in the R&D offset for all claimants, compared to those measures that were previously proposed to apply under the now-superseded Bill that was before the Senate.

For many claimants, the new rules will increase the value of the offset above that which is applicable under the existing rules. However, there will be a small category of claimants that will see the net benefit of their claims reduced. As the changes take effect no earlier than 1 July 2021, no immediate action is necessary, but potentially affected companies that currently spend or plan to spend money on R&D activities should start planning for the impacts on their future after-tax cash flows resulting from these changes.

In detail

Currently, the entitlement to a refundable or non-refundable R&D offset is based on the annual aggregated turnover threshold of $20 million. This distinction remains but the rates applicable to the offset will change as follows:

• The 43.5 per cent refundable offset (which applies to R&D entities with aggregated turnover less than $20 million) will be replaced by an offset that is fixed at 18.5 percentage points above the entity’s tax rate. For those entities that are “base rate entities” and subject to a company tax rate of 25 per cent from the 2021-22 income year, there is effectively no change in the refundable offset rate.
• For entities with at least $20 million aggregated turnover or R&D entities controlled by one or more exempt entities, the non-refundable offset, which is currently fixed at 38.5 per cent, will be replaced with an amount set at the claimant’s tax rate plus 8.5 percentage points for R&D expenditure between 0 and 2 per cent R&D intensity, and 16.5 percentage points for the portion of R&D expenditure above 2 per cent R&D intensity.

The table below compares the benefit for years commencing on or after 1 July 2020 to the new benefit for R&D entities at different aggregated annual turnover levels, and where total R&D expenditure does not exceed the new increased cap of $150 million per annum (amounts in excess of this are subject to an offset amount equal to the claimant’s tax rate).

_{* R&D intensity is measured as R&D expenditure expressed as a percentage of the R&D entity’s total expenses which are those reported in the company tax return (at item six), taken from the company’s financial statements.}

_{** For above $20m turnover claimants, the total offset is 8.5% on the first 2% of R&D expenditure, then 16.5% on R&D expenditure that exceeds 2% of total company expenses.}

The original proposal to impose a cap of $4 million on annual cash refunds will not proceed.

Supporting the increased benefit available to claimants are enhanced integrity measures, among which is that the Commissioner of Taxation will publish the names of all R&D claimants, together with the amount of the notional R&D deduction claimed. The Commissioner can publish this information in respect of claims made for the income years commencing on or after 1 July 2021 after the period of two years following the end of each financial year. This means the first published report will not be available any earlier than July 2024.

Under the original proposals included in the now superseded Bill, the Government estimated a net saving to the budget of $1.8 - $2 billion over the forward estimates. The new measures will instead increase the Government’s commitment to the R&D Tax Incentive by $2 billion over the forward estimates.

Also affecting R&D claimants are the 2020-21 Federal Budget announced changes to the Instant Asset Write-Off provisions. Under these measures, which are also now enacted into law, for entities with aggregated turnover up to $5 billion, a deduction is available for the full cost of eligible depreciable assets of up to any value in the year they are installed or ready for use. The full expensing period applies to eligible depreciating assets that are first held and first used or installed ready for use for a taxable purpose from 7:30pm AEDT on 6 October 2020 to 30 June 2022. To the extent that the asset is used in R&D activities, a proportion of this amount will be claimable as an R&D notional deduction. As this measure has already commenced, it will be relevant for R&D claims that will be made for activities taking place now.

The takeaway

Companies doing innovative work should consider whether such work may constitute eligible R&D activity. Where it is eligible, potential claimants should ensure robust records are kept to evidence the R&D being undertaken and all costs (particularly employee time)  incurred on the R&D activities.