12 December 2019
By Alun Needham, Principal Director – Government Incentives, KPMG
On 5 December 2019, the last sitting day of the year, the Government introduced legislation that will have significant implications for companies accessing the Research and Development Tax Incentive (R&DTI). As currently drafted, the proposed changes will impact income years commencing on or after 1 July 2019.
The proposed Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 reintroduces many of the reforms contained in last year’s Bill, the same measures the Senate Economics Legislation Committee recommended to be deferred subject to further consideration in February this year (see here). While the Explanatory Memorandum to the new Bill makes reference to the 2016 Review of the R&D Tax Incentive (see here) and the 2018 Innovation and Science Australia 2030 Strategic Plan (see here), it does not reference the 2019 Senate Committee report or include a collaboration premium as recommended by both the Review and Strategic Plan. Rather, the primary impact of the new Bill will be to reduce the R&D tax benefit for almost all companies.
For those accessing the non-refundable R&D tax offset, the Bill replaces the 38.5% tax offset with a scaled ‘R&D premium’ as shown in the table below and increases the current cap from $100M to $150M.
|Tier||R&D intensity range||Intensity premium|
|1||Notional deductions representing up to and including 4 percent of total expenses||4.5 percentage points|
|2||Notional deductions representing greater than 4 percent and up to and including 9 percent of total expenses||8.5 percentage points|
|3||Notional deductions representing greater than 9 percent of total expenses||12.5 percentage points|
While the Bill now contains only three R&D intensity ranges, the bottom range has changed from ‘up to 2%’ to ‘up to 4%’ R&D intensity thereby subjecting more R&D to the base rate of support. To perhaps offset this impact, the Government has slightly increased the intensity premium for the bottom range from 4.0 to 4.5 percentage points.
For those accessing the refundable R&D tax offset, the Bill will peg the R&D benefit at 13.5 percentage points above the relevant income tax rate. Therefore, for companies with turnover currently less than $50M, the refundable R&D tax offset will be 41%, down from the current 43.5%.
The Bill also includes a $4M cap on the cash refund. However, expenditure on ‘clinical trials’ will not contribute to the cap and, in all cases, tax offsets in excess of the cap will convert to non-refundable tax offsets. The concern here is the remaining lack of clarity as to what expenditure can be included under the definition of a clinical trial.
As a proportion of Gross Domestic Product (GDP), Australia’s Business Expenditure on R&D (BERD) continues to decline. Government support for BERD is essential to Australia’s future prosperity and we believe Australia, like our competitors, should be doing more, not less, to support innovation by industry.
It is therefore disappointing that the Government has seemingly ignored the bipartisan view of the Senate Economics Legislation Committee that the Bill be deferred subject to further consideration. As it stands, the Bill contains minimal changes from last year and thus does not address the concerns raised previously, including the retrospective enactment of the changes (albeit delayed by one year to 1 July 2019).
Parliament will consider the Bill further when it resumes in February 2020. We therefore recommend that companies, especially those likely to be significantly impacted by the Bill, speak to their local member of Parliament to draw their attention to this Bill and how it will affect your business and your future R&D program.