R&D Tax Incentive- Where to next?

The R&D tax incentive, introduced in its current form in 2011, is designed to provide a significant tax benefit to companies undertaking eligible R&D activities to help offset some of the cost of conducting that activity.

However, since January 2017 the ATO has taken a very aggressive stance against large accounting firms that it considered were incorrectly requesting R&D tax incentives.

The increased R&D audit activity eventually had a wider impact with the ATO issuing several tax alerts in relation to the software and construction industries.

Since December 2018 there have been several reports of high profile clients of large accounting firms being forced to pay back millions of dollars to the ATO in incorrectly claimed R&D tax incentives, and having borne significant tax penalties.

These events reinforce the need for sound legal advice in this specialised area to ensure businesses don’t have to repay R&D claims, face onerous tax penalties and the stress and expense of dealing with an ATO audit. Following compliance action by the ATO, the Federal  Government announced its intention to significantly amend the R&D tax incentive in the 2018-19 Budget, with draft legislation currently before the House of Representatives.

This has prompted miners, pharmaceutical companies and universities to speak out and warn the Government that the proposed changes will scare off local investment and force low R&D intensity companies to seek out other jurisdictions, such as New Zealand, who offer a higher premium on deductions and lower compliance costs.

On 12 February 2019 a Senate Committee recommended that the changes be deferred until further examination and analysis of the impact of the proposed changes is undertaken.

Should the legislation be passed in its current form, the R&D tax incentive will be amended as described below.

Companies with an aggregated turnover above $20 million

For companies with an aggregated turnover above $20 million, the Government will introduce an R&D premium that ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of the total expenditure for the year.

The marginal R&D premium will be the company’s corporate tax rate plus:

  • 4% for R&D expenditure between 0% and 2% R&D intensity;
  • 5% for R&D expenditure above 2% and up to 5% R&D intensity;
  • 9% for R&D expenditure above 5% and up to 10% R&D intensity; and
  • 5% for R&D expenditure above 10% R&D intensity.

The maximum amount of R&D expenditure eligible for concessional R&D tax offsets will also be increased from $100 million to $150 million.

Companies with an aggregated turnover below $20 million

For companies with aggregated turnover below $20 million, the Government will introduce the following:

  • a refundable R&D tax offset at a rate 13.5% above a company’s corporate tax rate;
  • a $4 million cap on cash refunds. Refundable R&D tax offsets from R&D expenditure on clinical trials will not count towards the cap; and
  • R&D tax offsets in excess of $4 million will be carried forward as a non-refundable tax offset.

With the proposed changes to the R&D tax incentive in limbo, businesses should seek legal advice regarding their current and future R&D claims under the existing system.

How can  Macpherson Kelley help?

  • The Macpherson Kelley Tax Team is a national team that has strong expertise in Federal taxes. We can assist in navigating the eligibility and registration requirements and ongoing compliance requirements for companies who undertake R&D.
  • With future R&D claims clients will be better placed by obtaining legal advice to ensure that their claims can withstand scrutiny in the event of an audit and minimise the exposure to significant penalties and interest.
  • Additionally, we can advise whether the proposed changes would impact existing claims or prior claims (if the changes are retrospective) and how to address that impact for your business.

This article was written by Melissa Simpson, Lawyer – Commercial and Danh Nguyen, Special Counsel – Commercial.