R&D tax incentive changes reintroduced

The 2018 budget changes to reduce the research and development (R&D) tax incentive has been reintroduced with some minor changes that companies should be aware of.

The amended incentive now applies to the 30 June 2020 R&D claim, but importantly, if a company is claiming the R&D tax incentive for the 30 June 2019 year, there are no changes.

Effective from 1 July 2019, for companies with an aggregated annual turnover of less than $20 million, the refundable R&D tax offset will become 41 per cent (being the company tax rate of 27.5 per cent plus 13.5 per cent R&D premium). The refund will be capped at $4 million per annum (except for clinical trials), with the remainder to be carried forward as an offset.

Also from 1 July 2019, companies with an aggregated annual turnover of $20 million or more, an R&D premium will be introduced that ties the rates of the non-refundable R&D tax offset to an incremental intensity (or percentage) of R&D expenditure as a proportion of total expenditure for the year.

The marginal R&D premium will be the company’s tax rate (either 27.5 per cent or 30 per cent) plus progressive R&D incremental intensity premiums, including:

  • 4 percentage points for R&D expenditure up to 4 per cent R&D intensity premium;
  • 8.5 percentage points for R&D expenditure above 4 per cent to 9 per cent R&D intensity premium;
  • 12.5 percentage points for R&D expenditure above 9 per cent R&D intensity premium.

Additionally, the $100 million R&D expenditure threshold has been increased to $150 million, allowing larger companies access to the R&D concession and be rewarded for eligible activities.

The government will also implement a series of compliance, enforcement and administration changes to improve the integrity of the R&D tax incentive. Although the majority of taxpayers do the right thing, some claimants, spread across all industry sectors, have engaged in behaviour 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.

Separately, the Small Business and Family Enterprise Ombudsman has reviewed the application of the R&D tax incentive to small businesses and has made various recommendations in relation to the administration of the R&D tax incentive. Further information on the outcome of the review is likely to be made public shortly.