The Australian Federal Budget was handed down on 6 October 2020, and outlined various economic stimulus measures with the intent to support Australia’s economic recovery through the COVID-19 pandemic and beyond.
Several key measures of the Federal Budget passed through both houses of Parliament on 9 October 2020 as the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020 which has been sent to the Governor General of Australia for Royal Assent.
Previous attempts by the Australian Government to reform the Research & Development Tax Incentive (R&DTI) and its administration were widely scrutinised, as the potential harm and uncertainty on eligible taxpayers were deemed by many to outweigh any potential benefits.
With this Bill, the Government has amended its position to one that has been far more widely embraced, receiving greater industry support as it provides certainty and assistance to taxpayers who seek to undertake R&D activities and intend to claim the R&D Tax Incentive.
Given the intricacies with which the R&D Tax Incentive and Division 355 of Income Tax Assessment Act 1997 (ITAA 1997) interacts with other Divisions, particularly Division 40 and Division 328 ITAA 1997, RSM further highlight the implications of technically complex elements of the budget measures, including the R&D Tax Offset Rate, Instant Asset Write Off (IAWO) and Loss Carry Back.
Specifically, this article will seek to provide clarity on how the new measures will interact with the R&D Tax Incentive and how this may affect the taxpayers’ ability to incorporate deductions as R&D eligible expenditure. Additionally, RSM will provide comment on the release of further guidance from upcoming Federal Court cases and its future impact on the application of the R&D Tax Incentive.
R&D Tax Offset Rate
The main difference under the Bill is that from 1 July 2021 the R&D tax offset rate is now based on the company’s corporate tax rate plus the addition of an R&D premium, where for large companies an R&D intensity calculation is necessary to determine the premium amount.
Claimants will also benefit from the cap on eligible R&D expenditure being increased from $100m to $150m.
Companies with aggregated annual turnover below $20m are entitled to the refundable R&D tax offset, where the offset rate is equal to their corporate tax rate plus an 18.5% premium.
Because the corporate tax rate for these companies (assuming they are base rate entities) from 1 July 2021 will be 25%, the resulting 43.5% R&D tax offset rate is identical to that received under the previous legislation.
With the proposed $4m annual cap on R&D tax offset refund payments being abolished, the financial benefit received is essentially unchanged for refundable claimants accessing the R&D Tax Incentive.
For larger companies, the Bill’s reformulation of the non-refundable R&D tax offset via an entity-based R&D intensity test has introduced complexity towards its application and instances where the tax benefit received is diminished.
The R&D intensity is the proportion of the entity’s total expenses spent on R&D expenditure for the income year.
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