On 5 December 2019, the Treasury Laws Amendment (R&D Tax Incentive) Bill 2019 was introduced to Parliament. This Bill proposes numerous changes to the R&D Tax Incentive program, based on a previous 2018 Bill that was temporarily shelved when the Coalition Government took over in August 2018. Rita Choueiri and Berrin Daricili from William Buck, AMTIL’s Corporate Partner for Accounting/Financial Advice, explain.

The revised Bill which will be considered by Parliament early this year (and if enacted expected to apply to all claims from 1 July 2019), could be a significant barrier for the growth of many companies such as the manufacturing sector that rely on government support like the R&D Tax Incentive for much-needed cash-injections.

Disappointingly, the proposed R&D Tax Incentive changes could decrease the benefits available to manufacturing companies performing legitimate R&D activities in Australia. The most impacted would be companies with an aggregated turnover (i.e. which includes the turnover of all grouped entities) above $20m that will be subjected to a new more complicated R&D intensity test. This test, if it results in a low ‘R&D intensity’ score (‘R&D intensity’ measured by eligible R&D deductions divided by total company expenses) could mean the company may receive a lower R&D benefit than in previous years. Despite numerous expert reports calling for manufacturing innovation in Australia to be nurtured, these changes to the R&D Tax Incentive may impact the manufacturing industry more so than other industries, as high operating costs associated with manufacturing is likely to drive manufacturing companies’ ‘R&D intensity’ down which may increase the likelihood of companies off-shoring their innovative manufacturing activities to lower cost jurisdictions or to ones where their R&D activities are better supported (e.g. countries offering a higher R&D tax benefit rate or other relevant incentives).

An example of the new R&D Intensity calculation would be; a manufacturing company is eligible for the non-refundable tax offset, has R&D expenditure of $1m, $10m total company expenditure and a corporate tax rate of 30%. Under the current R&D Tax Incentive rules this company would be receiving the 38.5% R&D tax offset rate and would receive an offset of $385,000 against its tax payable. However, if this Bill is successful, the company’s offset would be reduced to $373,000.

The table below illustrates how the tax offset rates would apply in this scenario.

R&D expenditure $1M
Total company expenditure $10M
R&D intensity (R&D expenditure/Total expenditure) 10%
4% intensity threshold ($10m x 4%) $400,000
9% intensity threshold ($10m x 9%) $900,000
Corporate tax rate x R&D expenditure (30% x $1m) $300,000
4.5% premium tax offset ($400,000 x 4.5%) $18,000
8.5% premium tax offset (($900,000-$400,000) x 8.5%) $42,500
12.5% premium tax offset (($1,000,000-$900,000) x 12.5%) $12,500
Total R&D tax offset ($300,000+$18,000+$42,500+$12,500) $373,000

 

Companies with an aggregated turnover below $20m will also be impacted as the refundable tax offset rate will be reduced from the flat rate of 43.5% to 13.5% above the applicable company tax rate and the refund will be capped at $4m. This means that the refundable R&D rate for 2019-20 will be 41% (down from the current 43.5% rate) and will be further reduced by 2.5-5% over the next three years in line with reductions in the corporate tax rate. Manufacturing companies currently receiving refundable offsets of greater than $4m (commonly those in the start-up phase) will see their refunds capped at $4m, with remaining offset amounts being treated as a non-refundable offset and applied to the claimant’s income tax payable. Any further offset amounts will be carried forward for use in future income years. However, note that this cap on the refund will not apply to R&D expenses incurred on clinical trials (which is relevant to manufacturing companies that develop medical devices or therapeutics that progress to clinical trials).

The proposed Bill also adds more layers of complexity to other already complex areas of the R&D Tax Incentive, namely the clawback, feedstock and balancing adjustment provisions. Regarding both feedstock and clawback, the previous provisions will be replaced with a ‘uniform clawback rule’ that will include an amount (subject to calculation) in the assessable income of the R&D entity. Balancing adjustments will provide tax deductions rather than notional R&D deductions, resulting in tax losses rather than tax offsets. Overall, these changes bring additional complexity to the R&D tax law and may further decrease the overall benefit of manufacturing companies claiming R&D.

Other proposed changes to the R&D Incentive include:

  • Increasing maximum annual R&D expenditure from $100m to $150m. Expenditure over $150m will not be subject to any R&D offset rate and will be taxed at the applicable company tax rate.
  • Amending the anti-avoidance provisions of the Income Tax Assessment Act 1936 to include the refundable and the non-refundable R&D tax offsets, allowing the Commissioner to apply anti-avoidance laws with respect to the R&D Tax Incentive to prevent claimants from engineering artificial arrangements to access the program.
  • The Commissioner of Taxation will publish information about companies accessing the R&D Tax Incentive, including the company name and R&D expenditure amount. Publication of this information will be delayed by two income years to safeguard sensitive activities.

Whilst the team at William Buck understand that the proposed changes are not law yet, we suggest that you consider your company’s eligibility for the new R&D Tax Incentive regime and the overall benefits of claiming. Please contact William Buck’s R&D team for a free consultation or further information about the R&D Tax Incentive and what the proposed changes mean for your company.

Rita Choueiri, Partner – Research & Development. P: 03 8823 6840; E: Rita.Choueiri@williambuckvic.com.au

Berrin Daricili, Manager – Research & Development. P: 03 8823 6846. E: Berrin.Daricili@williambuckvic.com.au