What does the new R&D tax credit offer you?

29 September 2011

Australia has progressively fallen behind in the Global Innovation Index for the last few years.  Last year alone, Australia slipped three places from 18 to 21, with Switzerland, Sweden and Singapore the top performing countries.  The restructuring of the R&D scheme has been in progress since 2009 before the enabling legislation was finally passed by both houses of Parliament last month. 

Why are we falling behind?

Boosting innovation is a question that has plagued the Government for some time and the restructuring of the research and development incentives is an attempt to better target and encourage true innovation. 

For many years the criticism has been that R&D funding is too narrowly applied to make a difference and generally relates to product development rather than innovation. 

SMEs under-represented in R&D funding

Small business has been vastly under-represented because in many cases the owners are simply unaware that what they are doing could qualify for the incentives available or because it appears complex and the amount of paperwork required to apply and sustain the funding may not be worth it. 

The irony is that in many cases SMEs are funding their own development whereas larger companies, that have a larger capacity to manage the cost of the risk of innovation, are capitalising on the concessions available. The new R&D tax incentive tightens the definitions for R&D funding in an attempt to give the Government a bigger bang for its innovation buck, and provides additional incentives for businesses under $20 million.

The other thing to bear in mind is that many small businesses simply don’t have the cash to invest in R&D beyond the concept stage of the innovation. There are a lot of ideas out there, but they stay ideas due to the lack of cash, time and focus. There’s nothing in the Government’s package that allows SMEs to address these issues.

What’s in it for small business?

For small companies with an aggregated turnover of less than $20 million, the R&D tax incentive provides a 45% tax offset for eligible R&D activities.  The offset is refundable so the company will receive a cash refund even if they are in a tax loss position. 

Until 2014, the offset is processed through the company tax return.  After 2014, small business will be able to access the R&D offset quarterly.  So, for a small company with a turnover of say $4 million with eligible R&D expenditure in 2011/2012 of $500,000, the company would be entitled to a refundable tax offset of $225,000 when it lodges its tax return for the year. For small business in particular, the R&D tax incentive provides a way of funding investment that they often already make. 

What’s in it for large companies?

For larger companies, a 40% offset is available for eligible R&D activities.  The offset is non-refundable so if a company is in a tax loss position they will not be able to utilise the offset in that year but can carry forward unused offset amounts in future years. The changes also expand access to the R&D tax credit to foreign companies that undertake R&D in Australia and to companies that hold their intellectual property offshore. 

Core or supporting activity

Eligible R&D activities are now categorised as either ‘core’ or ‘supporting’ R&D activities.  Core R&D activities are experimental activities where the outcome is unknown.  The primary purpose of core activities is to create new knowledge (that might result in a product).  Supporting R&D activities are activities that support core R&D activities.   The test for supporting R&D activities is tighter than previous definitions and companies that currently claim R&D tax offsets will need to ensure that their activities still qualify.

The R&D tax incentive applies from 1 July 2011.  Companies wanting to access the incentive will need to register with Innovation Australia.


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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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