RSM Australia

R&D cuts, Tax cuts – is it all bad news?

The reduction in the R&D tax incentive rates and the positive news for SMEs

During the 2016 Federal Budget in May, the Government announced a number of potential corporate tax rate cuts over the next 12 years, to progressively reduce the corporate tax rate from 30% to 25% for all corporate tax entities ultimately regardless of turnover.

One reason for cutting company tax is that it can encourage (re)investment as well as higher productivity; it can also encourage more investment from overseas. There are also studies to support that lower taxes ultimately leads to higher GDP in the economy and higher wages for workers. Some argue however that these resulting benefits are typically more advantageous to large companies rather than small ones. However with the recent disappointing news via the Omnibus Bill (passed on 15 September 2016) that the Federal Government will also cut the R&D Tax Incentive rates by 1.5% with effect from 1 July 2016, what will the real impact of these measures be on your R&D claims?

By way of background, when the R&D Tax Incentive program was introduced on 1 July 2011, the new mechanism by which to claim the R&D benefit was as a tax credit, to offset against tax payable (or cash out as a refund where applicable), rather than as an additional tax deduction which was how the previous R&D Tax Concession program worked. One reason for this change was to deliberately “de-couple” the R&D benefit from the corporate tax rate. The effect of this is explained in more detail below.

Basically, start-ups and small companies with aggregate annual turnover under $2m actually see an added benefit right here, right now. Last year, the Government reduced the income tax rate to 28.5 per cent for small companies from 1 July 2015 (small business tax rate), so those entities are actually getting an additional 16.5% permanent benefit on their 2015-16 R&D expenditure, with the difference between the small business tax rate of 28.5% and the R&D tax incentive rate of 45% being 16.5%. The combined effect of these 2 factors is that a company cashing out the R&D tax incentive might actually see another 1.5% of their claim back in cash than they would have previously.

How do further tax cuts interact with the R&D Tax Incentive?

In addition to the impact of the above tax rate reduction for 2015/16 year, as mentioned, further tax rate reductions are proposed.  The Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 has been introduced to Parliament.  If passed, it will progressively reduce the corporate tax rate to 25% by 30 June 2027. Following are the potential impacts.

Under the proposed new tax rates, this current income year from 1 July 2016 will see companies with aggregated annual turnover of less than $10m pay tax at 27.5%. So whilst the 1.5% reduction of the R&D tax credit will have an impact on most claimants this year, eligible companies with turnover of up to $10m will ultimately get an additional 1% benefit in tax savings than before the Omnibus Bill was passed (43.5% less 27.5% = 16%). Unfortunately, those companies with turnover greater than $10m will lose 1.5% of their R&D benefit, compared to prior years.

From 1 July 2017, the proposed threshold for the 27.5% tax rate will be further increased to $25m, so for the 45% refundable credit, companies that typically qualify (i.e. less than $20m aggregate turnover) will receive an additional 1% tax saving (43.5% less than new 27.5% tax rate provides a 16% permanent benefit).

For most R&D claimants that access the non-refundable 40% R&D tax credit, the permanent benefit was 10% of their eligible R&D expenditure but, due to the Omnibus Bill, this will be reduced by 1.5% for R&D claims for the current year commencing 1 July 2016 onwards.

Whilst the proposed cuts to the corporate tax rate will not provide any additional benefit to the larger R&D claimants for the next few years, there is better news in the long term. Looking forward, for the 2019-20 income year, the aggregated annual turnover threshold to access the 27.5% is a substantial $100m and this threshold increases to reach $1bn in 2022-23 before being ultimately removed altogether. In addition, the rate of corporate tax will further decrease to 25% over the following 4 year period from 2023–2027.

For reference, the full extent of proposed tax cuts and turnover thresholds in the Enterprise Tax Plan is set out below:

Year

Aggregated Annual Turnover Threshold

Entities under

the Threshold    

Other Corporate

Tax Entities

2015-2016

$2m

28.5%

30.0%

2016-2017

$10m

27.5%

30.0%

2017-2018

$25m

27.5%

30.0%

2018-2019

$50m

27.5%

30.0%

2019-2020

$100m

27.5%

30.0%

2020-2021

$250m

27.5%

30.0%

2021-2022

$500m

27.5%

30.0%

2022-2023

$1b

27.5%

30.0%

2023-2024

No threshold

27.5%

27.5%

2024-2025

No threshold

27.0%

27.0%

2025-2026

No threshold

26.0%

26.0%

2026-2027

No threshold

25.0%

25.0%

*The term aggregated turnover has the same meaning for both the R&D Tax Incentive and for the corporate tax rate cut thresholds noted above. It is defined in subsection 995 1(1) of the ITAA 1997 to have the meaning given by section 328-115. That section defines an entity’s aggregated turnover for an income year to mean, broadly, the annual turnover of certain amounts for the income year of the entity and of any entity that is a connected entity or an affiliate of the entity.


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