News & Insights

R&D Tax Incentives

Australia’s Federal Election campaign is well underway with voters to go to the polls to decide who will make up the next government on May 18.

Over the coming weeks, as Australians are bombarded with slogans and statements designed to sway the electorate, we’ll look at some of the policies on offer likely to affect businesses.

Research & Development (R&D) Tax Incentives

The R&D tax incentive initiative was introduced to stimulate industry investment in R&D in Australia and combat a lack of investment by companies and private investors.

Companies and external financing have historically been wary of investing in R&D for fear that the benefit of the work may never be captured (e.g.  the product or service doesn’t make it to the market or any monopoly obtained through registered intellectual property rights expires prior to generating a profit).

What is the incentive?

To support R&D investment, Innovation and Science Australia (ISA) and the Australian Taxation Office (ATO) administer a tax offset for R&D expenditure in one of two ways:

1. If you are an eligible company with a turnover of less than $20 million then you can receive a refundable tax offset; and if you are in a tax loss position then the offset can be paid as a cash refund; or
2. If you are an eligible company then you can receive a reduction in tax payable as a non-refundable tax offset.

An eligible company can either be a company incorporated under Australian law or a company incorporated under foreign law if they are an Australian resident for income purposes or they are a resident of a country that Australia has a double tax agreement with (e.g. China or Germany).

The tax offset is a particularly beneficial initiative for Small to Medium Enterprises or start-up companies that lack the resources or risk profile to invest in R&D.  It also was a future focused initiative for Australia’s economy so that businesses would be able to adopt new technology and remain competitive.

In July 2018, the Federal Government reviewed the incentive as it alleged the incentive was being exploited by larger companies who already had the budget for R&D –  e.g.  the Commonwealth Bank tried to claim $100 million for software development costs.

In the last two budgets, the Federal Government has cut the funding for the incentive by $4 billion.

Known political positions on the R&D Tax Incentive

Liberal/National Coalition – the Coalition has proposed to cap the refundable tax offset at $4 million.  This will impact companies  likely to spend more than $4 million on R&D in a financial year.

Labor – the Labor party hasn’t indicated whether cuts to the scheme will occur.  However, they have recognised the need for  reform.

Future of the R&D Tax Incentive

The R&D tax incentive is a significant tool utilised by innovative companies and is integral to Australia being seen as an innovative country.

For the future growth of knowledge and technology industries, these types of initiatives are needed to incentivise the creation of innovation and inventions.

It is pleasing to note that while the major political parties have expressed concern over the financial viability of the system and the need for its reform, neither party has explicitly said they’ll remove it.

It will be interesting to see how the R&D tax incentive is treated going forward and whether the next government will make innovation and technology growth a priority for Australia.

Macpherson Kelley understands the value of technology and intellectual property in your business.  If you need assistance with protecting your intellectual property and R&D efforts or assisting with your eligibility for the R&D tax concession then we can help.

Mark Metzeling, Special Counsel – Commercial and Intellectual Property and Nicola Stewart, Law Graduate – Commercial wrote this article.