R&D Tax Incentive Budget 2018: Changes you need to know

Summary

ALL Companies

• Increased compliance focus, more integrity measures, more reviews.
• Release of binding guidance similar to the ATO’s public rulings to provide more clarity around eligible R&D.

SMALL-MEDIUM Companies (Turnover less than $20M)

• $4M cap on refunds for companies with a turnover of less than $20M (excludes clinical trials).

LARGE Companies (Turnover greater than $20M)

• Introduction of a R&D premium intensity test for larger companies (turnover of greater than $20M) in which companies are rewarded for increasing R&D expenditure as a percentage of total company expenditure.
• Increase in the threshold for claiming the R&D tax incentive from $100M to $150M to reward large, R&D intensive companies.

Last night’s Federal Budget saw the Treasurer Scott Morrison announcing a reduction in the Research and Development Tax Incentive (R&DTI) program expenditure by $2.4 billion over four years. A range of measures were slated for the program to achieve these cost saving measures, and while much was made of fraudulent and intentionally erroneous R&DTI claims, it seems the key driver is to reduce the program’s costs by a likely reduction in what is defined as R&D.

The R&DTI program has seen many changes since 2011 and it would seem more changes to the interpretation of what is considered R&D within industry are afoot starting July 2018. These changes are likely to further reduce business confidence in the program both here and abroad.

While we welcome the news of Innovation and Science Australia finally producing binding guidance/“public findings” on the scope of what is eligible R&D, increased auditing activity (retrospectively applying this guidance) will increase the burden on companies with often drawn-out reviews. Additionally, any further narrowing of the definition of R&D within industry runs the real risk of reducing R&D activity in Australian businesses. We have already seen the BERD (Business Enterprise Expenditure on R&D) rate decline in recent years.

Integrity measures - increased compliance activity

The Government’s planned overhaul will look to “improve the integrity” of the program by implementing a series of compliance, enforcement and administrative changes.

This will be a multipronged approach including strengthening of anti-avoidance rules in the tax law, additional resourcing to “ensure ineligible R&D claims are denied”, and publishing the names of companies and the amounts of R&D spend to improve public accountability for R&D claimants. These transparency measures may provide some companies with discomfort in a competitive market.

Changes for SMEs

The Government also went ahead with the much talked about cap on R&D refunds based on the recommendations of the ISA 2030 Strategic Plan and the prior ”Ferris, Finkel and Fraser Review” of the program in 2016.

From 1 July 2018, companies with an aggregated turnover of less than $20M will only be able to receive refunds up to $4M with any balance of R&D expenditure carrying forward into future income years.

The Government excluded clinical trials in this cap which is of welcome relief for the biotechnology sector.

Additionally, the rate of the R&D tax offset will now be linked to the claimant company’s tax rate fixed at 13.5%.

Reduction in benefit for larger companies

For larger companies with a turnover of greater than $20M, a new R&D intensity test will apply. In an effort to increase the R&D spend and promote greater additional R&D effort in larger companies, the Government’s planned reforms aims to reward large companies with a higher R&D focus.

The new R&D premium for larger companies will provide higher rates of R&D tax offset for higher R&D intensity, (intensity being measured by the proportion of R&D expenditure to total annual expenditure in the company). There will be multiple rates of non-refundable R&D tax offsets linked to the level of expenditure.

Mid-size and larger companies will see a reduction in their benefit and increased complexity in the claim process.

In some good news, the Government has also increased the threshold for large companies undertaking R&D with greater than $100M of spend. The threshold for claiming the R&DTI benefit will be increased from $100M to $150M allowing large, R&D intensive companies the ability to claim the offset for more of their R&D. Only a small number of Australian companies fit into this range.