The impending overhaul of the R&D tax incentive system was originally intended to take effect from 1 July 2018; however the sweeping reforms are now set to take effect from 1 July 2019 – assuming the legislation passes Parliament.
Under these reforms, the way the R&D tax incentive applies will change to focus on ‘more intensive’ R&D activities, particularly in medical and clinical development. The changes attempt to refocus the incentive on activities that go well beyond what companies would normally do to improve.
Companies under $20m
For companies with an aggregated annual turnover less than $20 million:
- An annual $4 million cap will be introduced on cash refunds for R&D claimants. Amounts that are in excess of the cap will become a non-refundable tax offset and can be carried forward into future income years;
- Clinical trials will be excluded from the $4 million cap on cash refunds, to encourage development in this area; and
- The refundable R&D tax offset will be amended and will become a premium of 13.5 percentage points above the company’s tax rate for that year.
Companies over $20m
For companies with 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 the incremental intensity of R&D expenditure as a proportion of total expenditure for the year.
The R&D expenditure threshold – the maximum amount of R&D expenditure eligible for concessional R&D tax offsets – will be increased from $100 million to $150 million per annum.
In addition, where an R&D entity benefits from a government recoupment (such as a grant or reimbursement) for expenditure that is also eligible for the R&D tax offset, a clawback applies to reverse the double benefit that arises. The clawback is in the form of an additional 10% tax on the recoupment.
The ATO has stated that once the legislation has passed, taxpayers will need to review their position for the 2019-20 year to ensure compliance with the new laws. We will keep you up to date of the progress of these reforms.