R&D Tax Incentive

From July 1^st, 2011, the new R&D Tax Incentive System will be implemented.

What does this mean for your company?

It is called the R&D Tax Incentive scheme, and the bottom line effect is a doubling of the tax benefit for companies in profit and an increase of 20% in the benefit to tax loss companies. Companies which had a valid claim under the old tax concession will continue to have a valid claim under the new regime, but the benefits will increase. Companies will begin accessing this scheme in their tax returns at the end of June 2012. In the meantime they still need to prepare claims under the old tax concession rules for the 2010-11 year. You have until April 30, 2012 to do this.

More good news – there will no longer be a limit on how much aggregate R&D expenditure you can claim. Currently the limit is $2M, and the group turnover limit is being increased from $5M to $20M, meaning more companies will likely become eligible for the scheme.

From 1 January 2014, The Australian Government will introduce quarterly payments for small and medium businesses. These firms will get their credit sooner, significantly improving their cash flow and incentive to invest in R&D.

Some of the major changes include:

Areas of the new program which represent a departure from the existing Concession and R&D Tax Offset are as follows:

Changes to the definition of “Core R&D Activities”

Computer Software R&D

Included in the list of excluded core R&D activities is the development of computer software for internal business administration purposes. This exclusion replaces the ‘multiple-sale’ requirements for computer software R&D under the Concession, and in essence, prevents an applicant claiming benefits for R&D aimed at the development of computer software which will not be commercialised in some way by that company.

Core R&D Activities

Core R&D activities are experimental activities:

• whose outcome cannot be known or detrmined in advance on the basis current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:

1. is based on principles of established science; and
2. proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and
   • that are conducted for the purpose of generating new knowledge (including the creation of new or improved materials, products, devices, processes or services.

Supporting R&D Activities

A ‘supporting R&D activity’ is defined as an activity directly related to a core activity. The nature of private-sector R&D is such that under the new R&D Tax Incentive many supporting activities (and their costs) will be excluded from eligibility unless they can also be shown to have the dominant purpose of supporting one or more core R&D activities i.e. it cannot be related to the production of goods and services but to the R&D only. 

Other changes

• A new exclusion which denies any entitlement to R&D Tax Incentive for expenditure incurred in the purchase of "core technology" (being items of intellectual property that form the basis for further R&D);
• No R&D Tax Incentive entitlement for interest payments made in relation to the cost of funding R&D activities - a major blow to start-up and early-stage claimants who currently benefit from a refundable R&D Tax Offset on these expenses under the Concession;
• No 175% Incremental R&D benefits for increased average expenditure on R&D;
• No R&D expenditure limit for refundable benefits to firms with grouped turnover of less than $20m (the current refundable R&D Tax Offset contained in the Concession program is limited to $2m of R&D expenditure in any one income year);
• Program benefits available to some non-resident foreign companies carrying on business in Australia via a permanent establishment.