The R&D Tax Incentive in Review

Key points at a glance

  • The Australian Government supports innovation by providing the R&D Tax Incentive
  • The incentive is currently under review
  • Recommendations that may affect startups includes clarity, intensity threshold and improved administration the R&D incentive
  • PwC R&D Specialist, Daniel Davila, gives an overview
How changes are affecting startups and small businesses

Australia is home to exceptional talent when it comes to innovative startups and small businesses. However, when compared to other OECD countries, there is a relatively poor level of VC and investor funding available to these businesses.

One way that the Government provides a significant impact on supporting innovation for our nation is through the R&D Tax Incentive, a targeted tax offset available to startups and businesses across a range of industries that are developing or experimenting with new and improved products and processes. In addition to corporate tax changes that have recently come into effect, the R&D Tax Incentive is under review and a number of proposed changes will affect startups and small businesses seeking to invest in innovation.

I have put together a summary of current and proposed changes, to help you determine how your business could be affected.

Changes to the R&D tax offset rate and corporate tax rate

As part of the changes recently passed in the Government’s $6 billion Omnibus Bill, the tax offset rate for R&D claims has been reduced by 1.5% from financial years starting 1 July 2016. Previously the tax offset rate was 45% (refundable) of the eligible R&D expenditure for companies with an aggregated turnover <$20million. This is now 43.5%. For companies with an aggregated turnover >$20million, the 40% (non-refundable) tax offset has been reduced to 38.5%.

In the 2016-2017 budget, changes to the corporate tax rate were announced (you can find the ATO guidelines here) which will also impact the benefit received if passed as law.

Here is how to determine your benefit:

For companies in profits, the benefit of claiming R&D is equal to the R&D tax offset amount less the corporate tax rate. Hence, for the year ending 30 June 2017, the net benefit for companies with a combined turnover >$20 million under these changes would be 8.5% of every $1 spent on R&D (38.5% less 30%). For companies with a combined turnover <$20 million the net benefit under these changes would be 13.5% (43.5% less 30%) or 16% (43.5% less 27.5%) depending on the company’s tax rate.

For companies with a grouped turnover <$20 million and with tax losses, as there is no tax payable the refund can be up to the entire 43.5% tax offset amount.

Hence, while the reduction in the R&D offset rate has decreased the benefit of R&D claims by 1.5%, if the ten year corporate tax rate reduction proposal passes, the net benefit of claiming will increase each year, however there is no word yet on whether the R&D tax offset will also be altered to account for the reduced rates.

Proposed R&D Tax Incentive program changes

In October 2016 the Government released the “Ferris Finkel Fraser Review” which recommended six changes to the R&D Tax Incentive program that could affect a range of Australian businesses if put in place. You can find a summary of the review, along with submissions providing recommendations on the review here.

A few of the key recommendations that have the potential to impact startups and small businesses include:

Recommendation #1: Clarity

Retain the current definition of eligible activities and expenses, but develop new guidance including plain English summaries, case studies and public rulings.

Greater clarity will improve certainty around expenditure and claiming, which will simplify the process and encourage more eligible businesses to apply.

Recommendation #4: Intensity threshold

Introduce an intensity threshold in the order of 1-2% for recipients of the non-refundable component of the R&D Tax Incentive, so that only R&D expenditure in excess of the threshold attracts a benefit.

Many businesses may see a significant reduction in their benefits under this proposal. If this recommendation was implemented, it is likely that hundreds of current claimants would become ineligible to access the incentive — even at the lower 1% threshold level of intensity.

Recommendation #6: Improve administration

The Government should investigate options for improving the administration of the R&D Tax Incentive. This could involve strategies such as:

  • Adopting a single application process
  • Developing a single programme database
  • Reviewing the two-agency delivery model
  • Streamlining compliance reviews and findings processes
  • Additional resourcing
  • Publishing names of companies claiming the incentive to improve transparency

While adopting a single application and compliance model would be beneficial and time-saving for businesses, publishing applicant names could release information that is commercially sensitive in nature.

Planning for the future

If you need assistance with planning your future R&D activities or help understanding how these changes will impact your business, PwC can assist in providing specialist advice and reviewing your claim to ensure you don’t miss any of the new changes.

If you spend more than $500,000 per financial year on R&D, you can seek advice from PwC R&D consulting services. If your spend is less, check out Nifty R&D, backed by PwC. You can sign up online for assistance, and if we find you’re ineligible to apply, you won’t be charged a cent.