$2 billion boost to the R&D Incentive creating certainty and opportunity

Australian innovators are big winners in the 2020 Australian Federal Budget with contentious changes to the R&D Tax Incentives that would have wiped $1.8 billion from the program being reversed. Instead, there will be a new $2 billion boost, including a lifting of the offset rate and rewarding those business that invest more in R&D.

Proposed changes to the R&D Tax Incentive (RDTI), which included reductions in the refundable tax offset, a cap on refunds, and a new, complex tiered benefit system in the form of an R&D intensity test for larger businesses, have been taken off the table in a bid to encourage R&D investment in Australia and to help businesses navigate the economic impacts of COVID-19.

What are the key changes?

The R&DTI will continue to be offered in two streams:

  1. A refundable tax offset of 18.5% above the company tax rate for eligible entities with an annual turnover of less than $20 million
  2. A non- refundable tax offset based on a simple, two tier R&D intensity test for eligible entities with an annual group turnover of more than over $20 million. The two tiers are:
  • a baseline rate of 8.5% above the tax rate against eligible R&D expenditures which account for up to 2% of total company expenses, and
  • an additional 16.5% (above the company tax rate) for eligible R&D expenditure in excess of the baseline 2% intensity test.

In addition, the R&D expenditure cap will be increased from $100 million to $150 million per annum.

This is a huge win for larger businesses with an R&D intensity of more than 2%, and keeps the existing R&D benefit in place for all other R&D entities with over $20 million in group turnover.

The changes are designed to provide greater certainty for R&D investment, while still incentivising entities for which R&D forms a greater proportion of their business expenditure.

Below is a practical summary of the impacts over the pertinent years.

How can we help your business?

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Companies with a group turnover of less than AUD$20m:

  • Company Tax Rate: 27.5%
  • Refundable Tax Benefit: 43.5% cash refund/rebate or 16.0% tax reduction

Companies with a group turnover of between AUD$20m and AUD$50m:

  • Company Tax Rate: 27.5%
  • Non-Refundable Tax Offset: 11%

Companies with a group turnover of AUD$50m or greater:

  • Company Tax Rate: 30%
  • Non-Refundable Tax Offset: 8.5%

Companies with a group turnover of less than AUD$20m:

  • Company Tax Rate: 26.0%
  • Refundable Tax Benefit: Up to 43.5% cash refund/rebate or 17.5% tax reduction

Companies with a group turnover of between AUD$20m and AUD$50m:

  • Company Tax Rate: 26.0%
  • Non-Refundable Tax Offset: 12.5%

Companies with a group turnover of AUD$50m or greater:

  • Company Tax Rate: 30%
  • Non-Refundable Tax Offset: 8.5%

Companies with a group turnover of less than AUD$20m:

  • Company Tax Rate: 25.0%
  • Refundable Tax Benefit: Up to 43.5% cash refund/rebate or 18.5% tax reduction

Companies with a group turnover of between AUD$20m and AUD$50m:

  • Company Tax Rate: 25.0%
  • Non-Refundable Tax Offset Tier 1: 8.5% where R&D expenditure is up to 2% of company expenditure
  • Non-Refundable Tax Offset Tier 2: 16.5% where R&D expenditure exceeds 2% of company expenditure

Companies with a group turnover of AUD$50m or greater:

  • Company Tax Rate: 30.0%
  • Non-Refundable Tax Offset Tier 1: 8.5% where R&D expenditure is up to 2% of company expenditure
  • Non-Refundable Tax Offset Tier 2: 16.5% where R&D expenditure exceeds 2% of company expenditure

The budget bill has now received Royal Assent and will be in effect from 1 July 2021. In the interim the R&DTI remains unchanged for 2019-2020 registrations, although the company tax rate reductions vary based on a company’s annual turnover and the permanent tax, or net benefit will vary for companies with an annual group turnover of between $20 million and $50 million.

Other changes to the RDTI include the consolidation of the rules for the clawback of R&D recoupments and feedstock adjustments where an R&D entity must now purge the entire benefit of an R&D tax offset to the extent it receives a recoupment amount, feedstock adjustment or assessable balancing adjustment because of the offset. Additionally, the operation of the general anti-avoidance provisions in Part IVA will now be applied to schemes involving R&D tax offsets.

COVID has seen many historically profitable businesses dip into losses who could now benefit from cash refunds from the R&DTI. Additionally, businesses that have historically exceeded the $20 million refundable offset cap might now, as a result of COVID-19 downturns, potentially fall under the $20 million turnover cap and have tax losses that could be the subject of potential R&D refunds.

Importantly, and regardless of the generosity in these changes, all RDTI registrants need to be mindful of the R&DTI regulators’ ongoing emphasis on record keeping practices of claimants that seek to substantiate how they self-assessed their eligibility with the program.

If you have any questions as to how the Australian federal budget impacts your business and your R&D claims, please contact your local Bentleys R&D tax expert. We are here to help you access your entitled incentives, and to help you get where you want to be.

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

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