R&D budget changes and impact
R&D activities are crucial to sustained economic growth and improve the standard of living through the accumulation of new processes and products, the quality enhancement of current ones. This increases profitability of corporation by building up productivity and diminishing operating costs.
However, the changes to the R&D Tax Incentive will disproportionally impact across the economy depending on the level of innovation intensity, especially biotechnology, medical technology and pharmaceutical sector where many organizations will be affected by the changes, either directly/indirectly in the foreseeable future.
1. Raise the max amount of R&D expenditure eligible
a. the 43.5% refundable offset (companies with turnover of less than $20 million);
b. Or 38.5% non-refundable offset (companies with turnover of $20 million or more) from $100 million to $150 million;
2. For organizations with an aggregated annual turnover above $20 million, a marginal R&D premium is announced depending on the incremental R&D intensity.
3. For companies with aggregated turnover below $20 million, the refundable R&D tax offset will be applicable for a premium of 13.5 percentage points that is above an organization’s tax rate.
4. Cap cash refunds from the refundable offset to $4 million per year (Note: R&D tax offsets in excess of the $4 million will be carried forward and become non-refundable tax offsets in future years. Also, expenditure on "clinical trials" will be exempt from this $4 million cap.)
5. Publicly disclose claimant details and the R&D expenditure. This includes increasing the
ATO and AusIndustry’s capacity to enforce the laws and provide crucial guidance to claimants;
6. Bigger budget will be placed on compliance to ensure organization’s ability to have their claims verified and auditable.
7. Legislative changes to time extensions and certain technical provisions
Manufactures and mining companies
The government has targeted large companies with relatively small percentage of expenditure on R&D. The scheme will encourage companies to use their tax breaks on research and development but retaining tax perks for small business’s equipment purchases.
However, this can have an adverse impact on manufacturers and mining companies as the budget cut $1 billion a year from the R&D tax incentive scheme without offsetting increases in grants elsewhere. Consequently, this "R&D intensity" model could be an advantage for importers at the expense of Australian manufacturers due to its high domestic manufacturing cost base.
● Companies with annual turnover of more than $20 million that spend less than 2% of their business expenses on R&D can only claim a tax offset of four percentage points (above the 30% marginal tax rate) of their R&D expenditure.
● For the portion spending between 2% and 5% of total business expenses on R&D, they can claim an offset of 6.5%. It is only when the proportion of R&D expenditure reaches between 5% and 10% that the offset at 9% exceeds the previous level.
● For those few large companies spending in excess of 10% of business expenses, the spending above 10% can be offset at 12.5%. This will potentially increase the value of the concession compared to previous years for those companies spending significantly more than 10% on R&D.
This could see a shift to more favorable R & D jurisdictions such as New Zealand - which
offers a 12.5 per cent premium on deductions for R&D which is more appealing for experiments.
There have been mixed reactions to the scheme from New start-up companies.
“Although the majority of taxpayers do the right thing, some claimants, spread across all industry sectors, have engaged in behavior 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,” the government stated.
The introduction of the $4 million annual cap on cash refunds for claimants with an aggregated annual turnover of less than $20 million has been welcomed by many start-ups where the focus on genuine claims. However, with that placement on integrity and a crackdown on claims, it’s crucial for the government to provide clarification around the eligibility of startups in the scheme.
There is further concern that the measures have too much focus on the Research side with less emphasis on the Development side. For software and application developers means that more caution and advise is required to ensure they do not fall foul of the new measures.