The Government has announced reductions in the rates of the research and development (R&D) tax offsets. The reductions (effective from 1 July 2014) will result in savings of $550m in underlying cash balance terms over the forward estimates.
The research and development tax offsets prior to the 2014–15 Budget
There are currently two offsets available to companies that engage in eligible R&D research:
- a 45 per cent refundable tax offset is available to entities with a turnover of less than $20m and
- a 40 per cent non-refundable tax offset (that can be carried forward) is available to all other eligible entities.
The R&D offsets are a mechanism that uses the corporate tax system to provide incentives to engage in research and development, and to support companies engaged in research and development that are not making a taxable profit. After reducing the tax liability of an eligible entity, the balance of a refundable offset can be paid as a refund, while the non-refundable offset can be carried forward and reduce tax in future years.
The R&D offsets are the latest version of a tax incentive that has existed in various forms since 1986; the current system – the Research and Development Tax Incentive – came into effect from 1 July 2011. Legislation is currently under consideration by the Senate (after passing the House of Representatives in December 2013) to ‘limit the research and development (R&D) tax incentive to companies with aggregated assessable income of less than $20 billion’.
Changes announced in the 2014–15 Budget
Budget Measures: Budget Paper No. 2: 2014–15 states that ‘Consistent with the Government’s commitment to cut the company tax rate from 1 July 2015, the Government will preserve the relative value of the of the Research and Development Tax Incentive by reducing the rates …’ From 2014–15 the ‘rates of the refundable and non-refundable offsets will be reduced by 1.5 percentage points to 43.5 and 38.5 per cent respectively’.
There are different measures of the value of a tax offset:
- In absolute terms, the value of the R&D offsets will decrease. For any given R&D expenditure, there is now a smaller reduction in tax liability available through the R&D offset. Additionally, for those companies not making a taxable profit in a given period, the refundable tax offset will now offer a smaller cashflow.
- From 2015–16 (the first year in which the company tax rate cut is expected to take effect) the margin between the R&D offset rates and the company tax rate will return to 10 and 15 percentage points (for the non-refundable and refundable tax offsets, respectively). This means that the net tax benefit of the R&D offsets will return to current levels.
While the Government has linked the changes to the R&D offset rates to planned changes to the company tax rate, it has not commented on the timing of the changes, or the interaction between the proposed Paid Parental Leave levy and the offset rates.
While the company tax rate will be reduced from 2015–16, the offset rate will be reduced from 2014–15. For the 2014–15 financial year eligible companies will be liable for the current company tax rate, while receiving a lower offset.
Additionally, a number of companies claiming the R&D offsets are likely to be liable for the proposed 1.5 per cent levy on companies with taxable incomes above $1.5m. These companies will face a reduced offset while their marginal tax rate is effectively the same; for those companies, a lower offset rate with a 30 per cent marginal tax rate will mean that the net tax benefit of the R&D offset has decreased.
. AusIndustry, ‘Program Information: About the R&D Tax Incentive’, AusIndustry website, accessed 20 May 2014. Entities must be either a corporation ‘incorporated under an Australian law, incorporated under foreign law but an Australian resident for income purposes’, or operating a permanent establishment in Australia through a double taxation agreement; special rules apply for some corporate structures. For more detail see the Australian Taxation Office (ATO), ‘Research and development tax incentive: eligible entities’, ATO website, 11 December 2012, accessed 22 May 2014.
. Ibid., For a more general discussion of the R&D tax incentive scheme see J Murray, Tax Laws Amendment (Research and Development) Bill 2010, Bills digest, 165, 2009–10, Parliamentary Library, Canberra, 2010, accessed 20 May 2014, or K Sadiq, ‘Powering innovation through tax concessions : the changing research and development tax incentives’, paper presented to the 22nd Australasian Tax Teachers Association Conference, Sydney, 20–22 January 2010, accessed 21 May 2014. For more context on innovation funding see Department of Industry, Australian Innovation System Report 2013, Department of Industry, 2013, accessed 20 May 2014, or J Daley, J Reichl and L Ginnivan, Australian Government spending on innovation, Grattan Institute, March 2013, accessed 20 May 2014.
. B Pulle, Tax Laws Amendment (Research and Development) Bill 2013, Bills digest, 15, 2013–14, 2013, Parliamentary Library, Canberra, 2013, accessed 20 May 2014, p. 1; Parliament of Australia, ‘Tax Laws Amendment (Research and Development) Bill 2013 homepage’, Australian Parliament website, accessed 21 May 2014.
. AusIndustry, ‘R&D Tax Incentive’, AusIndustry website, accessed 20 May 2014. The Government has not yet introduced legislation to make this change, but it will likely require legislative changes to the Income Tax Assessment Act 1997.
. The net tax benefit is a measure of the net benefit (including any refunds from the refundable offset) to a company from transferring spending from ineligible expenditure to eligible R&D expenditure. For a more detailed example, see Annex 8 of the Report on the review of the national innovation system, Review of the National Innovation System Panel, 2008, accessed 20 May 2014.
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