The post-COVID economic environment is driving Australian businesses to be more innovative with a proposed new Federal Government Research and Development (R&D) rate receiving Royal Assent.
An R&D incentive regime has been operating since the mid-1980s and is designed to encourage innovation in Australia. In recent times however, the government has increased its scrutiny of businesses accessing the benefit, and there have been a number of amendments to the legislation.
The government has recently acknowledged the importance of R&D by proposing the following changes to the R&D Tax Incentive from 1 July 2021:
- A refundable offset of 18.5 per cent plus tax rate (43.5 per cent offset for companies with a 25 per cent tax rate)
- A non-refundable tax credit available via one of two tiers:
» 1. 8.5 per cent additional tax credit R&D intensity 0-2 per cent (38.5 per cent offset for companies with a 30 per cent tax rate)
» 2. 16.5 per cent additional tax credit R&D intensity 2 per cent above (46.5 per cent offset for companies with a 30 per cent tax rate).
In order to access the R&D Tax Incentive an eligible entity must conduct or plan to conduct at least one eligible Core R&D activity. A Core R&D activity is an experimental activity that is conducted for the purpose of generating new knowledge (including new or improved materials, products, devices, processes or services) whose outcome cannot be known or determined in advance on the basis of publicly available current knowledge, information or experience. However, it can only be determined by applying a systematic progression of work based on principles of established science and proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions.
In accessing the tax offset, it’s critical businesses maintain a detailed record of all processes and financials, as some applications have been declined on the basis of insufficient documentation.
Sectors that have benefited significantly from access to the R&D Tax Incentive include IT, manufacturing, mining and agribusiness. Discovering new deposits in mining in particular requires innovation so mining companies often meet the definition of R&D. Within agribusiness, creating efficiencies from products impacted by climate change means agribusiness-based companies are also likely to qualify.
Importantly, however, the Incentive can be applied to every industry, and with all businesses needing to innovate more than ever, it’s an opportune time to seek out such a benefit. Understanding whether an entity intends to undertake R&D activities can allow these businesses to budget costs more effectively as they will be reduced through decreased tax payments and potentially cash refunds.
R&D applications must be lodged within 10 months after the end of the tax year. Companies have until 30 April 2021 to lodge an R&D application for activities that were undertaken in the year ended 30 June 2020.