As the treasurer Scott Morrison handed down his 3rd budget, there was no surprise that there’d be some changes to the Research and Development Tax Incentive. Mr Morrison has been suggesting there would be a tightening of the rules for weeks now. Yesterday came the news:"We are cracking down to ensure that R&D tax incentives are used for their proper purpose, with enhanced integrity, enforcement, and transparency arrangements, saving taxpayers AU$2 billion over the next four years," Mr. Morrison announced in his Budget speech on Tuesday night,
"To support companies genuinely investing in R&D, we are refocusing the R&D tax incentive to give more support to companies that invest a higher proportion of what they spend in R&D, over and above what others would just do anyway."
According to the government, it will use the findings of its 2016 review of the R&D tax incentive to reform the program, as it was seen to be failing at its very goal of creating more innovation in Australia that would have flow on benefits to the economy.
By "sharpening its focus on additional eligible business R&D while ensuring its ongoing fiscal affordability" the program will aim to make it harder for businesses to exploit the incentive while also ensuring innovative companies are still being rewarded for compliance.
The R&D tax incentive program categorises companies into 2 categories based on their annual turnover:
Less than $20m
Greater than $20m
On the surface of it, it would appear the vast majority of the changes will affect companies with turnover greater than $20m.
This should mean great news for companies with less than $20m turnover as the funds will be better channelled in their direction. Coupled with the $20,000 instant asset write-off – which allows businesses turning over less than $10 million to immediately deduct eligible purchases of assets - the next few years for innovative small to medium sized businesses should be pretty kind to them.
The Nitty Gritty
For companies with an aggregated annual turnover of less than AU$20 million, the refundable R&D offset will be 13.5 percentage points above a claimant's company tax rate, capped at AU$4 million each year. This means companies will still be able to claim 43.5% of their R&D expenditure, however only a portion of it will be returned as a cash refund. Amounts that are in excess of the cap will become a non-refundable tax offset and can be carried forward into future income years.
"Other changes 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, and amendments to technical provisions (such as the feedstock and clawback rules and the general anti-avoidance rules)," the Budget papers explained.
It’s hoped these changes will ensure the R&D tax incentive is transparent. The compliance and administrative improvements to the R&D tax incentive program, meanwhile, will see the Australian Taxation Office and Department of Industry, Innovation and Science undertake "greater enforcement activity and provide improved program guidance to participants."
So the Australian Federal Government aims to save money by limiting unscrupulous businesses from claiming this incentive while maintaining the generous tax rebate to help incentivise the smart economy Australia aims to be.
If you think your business might fit the mould for the R&D tax incentive, why not talk to our 24/7 grants expert?