Budget 2018: Changes to the R&D Tax Incentive and ‘Fame’ Tax

The Federal Budget for 2018 was handed down on 8 May 2018 and numerous changes will come into effect from 1 July 2018.  Two notable changes in the budget are the introduction of a cap on the Research and Development (R&D) Tax Incentive and a “fame” tax, which will significantly affect start-ups and high profile individuals, respectively.

R&D tax incentive

In response to the recommendations of the 2016 Review of the R&D Tax Incentive, the Government will amend the R&D tax incentive, with changes to apply from 1 July 2018.

“Although the majority of taxpayers do the right thing, some claimants, spread across all industry sectors, have engaged in behaviour such as incorrect self-assessment of eligible R&D activities, exaggerating their expenditure claims, ‘pushing the boundaries’ of the interpretation of the R&D definition and engaging in other forms of non-compliance

Accordingly, from 1 July 2018, the Government will introduce a $4 million annual cap on cash refunds for companies with aggregated annual turnover of less than $20 million. For companies with aggregated annual turnover of $20 million or more, the cap will become a non-refundable tax offset that can be carried forward.

The Government says it will further improve the integrity of the R&D program by implementing stronger compliance and administrative improvements. These improvements include increased resourcing for the Australian Taxation Office (ATO) and Department of Industry, Innovation and Science, which will be used to undertake greater enforcement activity and provide improved program guidance to participants.

Other changes to the R&D Tax Incentive include improving the transparency of the program by enabling the ATO to:

  • publicly disclose claimant details and the R&D expenditure they have claimed
  • limits on time extensions to complete R&D registrations
  • amendments to technical provisions.

These changes indicate that start-ups incurring high R&D costs prior to earning any significant income, may be harshly penalised by the introduction of the refund cap.  Accordingly, ensuring an appropriate corporate structure and forward planning will be essential to maximising a start-ups ability to claim R&D tax incentives without being affected by the cap.

Celebrities hit with “fame” tax

Celebrities will be hit with new rules on their image rights to ensure they’re paying the correct income tax.

From 1 July 2019, the Government will ensure high profile individuals will no longer be able to take advantage of lower tax rates by licensing their fame or image to another entity.

Currently, high profile individuals such as sportspeople or actors can license their image rights to a related company or trust, and income for the use of their fame and image then goes to the entity holding the licence. This creates opportunities for high profile individuals to take advantage of tax minimisation schemes.

Under the new measure, all remuneration (including payments and non-cash benefits) provided for the commercial exploitation of a person’s fame or image will be included in the assessable income of the individual.

Macpherson Kelley will be keeping a close eye on the wording of the legislation, as it is likely the ownership of a registered trade mark (for the celebrity’s name and/or image) by an incorporated entity (i.e. not the famous individual) and its use by that entity may not be included under the ‘fame’ tax.

Take home points

  1. Forward planning is the key: having a clear understanding of the tax implications and what steps you (if you’re a famous individual) or your company will need to take is essential to maximising your ability to claim the R&D Tax Incentive, and/or not be included under the ‘fame’ tax.
  2. Ensure your corporate structure is correct and there are appropriate licences/agreements in place.
  3. Ensure you have strong intellectual property and tax strategies in place for yourself or your business.

If you have further queries about how the R&D Tax Incentive or the ‘Fame’ Tax may affect your business, please contact Mark Metzeling, our Intellectual Property team, or our Tax team.

Our award-winning IP team utilise their scientific, engineering and technology backgrounds to successfully protect, enforce and commercialise clients’ patents, trade marks, designs and copyright in Australia, New Zealand, and globally. Our lawyers and attorneys have proven experience in effectively implementing protection strategies for a wide array of clients covering most industries.

Our approach to tax is simple: we’re focused on creating value for our clients, reducing risk and managing costs. In addition, our experienced team are prepared to have direct conversations about the opportunities, outcomes and strategies to manage pitfalls. With a depth of expertise covering income tax, CGT, GST, stamp duty, landholder duty, land tax and employment taxes, our national team is  focused on providing holistic but specialist tax advice for our business clients and owners.

This article was written by Mark Metzeling, Special Counsel – Commercial and Cecilia Chau, Lawyer – Commercial.