The Research and Development Tax Incentive (R&D Incentive) has been in operation since 1 July 2011 and certain changes come into effect on 1 July 2021, which were announced in the 2020 Federal Budget. This article reviews those changes.
See below for further detail.
The Research and Development Tax Incentive (R&D Incentive) has been in operation since 1 July 2011. The purpose of this initiative is to encourage innovation entities to grow and elevate their creative projects in Australia. The Department of Industry, Science, Energy and Resources (AusIndustry) and the Australian Taxation Office (ATO) regulate the R&D Incentive. AusIndustry administers the R&D Incentive, and the ATO reviews the R&D Incentive claims, when lodged by the entity.
Reforms to the R&D Incentive were introduced as part of the Federal Budget in 2020/21 and was part of the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 (see also Bill on APH site). Accordingly, the following changes have come into effect as at 1 July 2021:
Changes to the R&D scheme
The following new laws were introduced to the R&D scheme:
- The tax offset for eligible R&D activities are based on a premium on top of the corporate tax rate
- Entities with less than an aggregated turnover of $20 million – may claim a refundable R&D tax offset, this is the corporate tax rate plus an 18.5% premium. Previously entities making less than $20 million could claim a tax-offset rate of 43.5% (for a 30% corporate taxpayer, this is now 48.5%).
- Entities with more than an aggregated turnover of $20 million, may claim a non-refundable R&D tax offset, which is the corporate tax plus an incremental premium that varies depending on the level of ‘R&D intensity’. Previously entities making more than $20 million could claim a non-refundable R&D tax offset at a rate of 38.5% (an 8.5% premium).
- The expenditure threshold has increased from $100 million to $150 million and is now a permanent feature of the law.
- A tax benefit can be denied by the Tax Commissioner in the form of an amount of a refundable or non-refundable R&D tax offset that an R&D entity seeks to obtain from a tax avoidance scheme.
- A new ‘uniform clawback’ rule.
- Changes to assessable income for R&D entities.
- Changes to R&D entity’s deductions.
- Changes to balancing adjustments for R&D assets held by R&D partnerships;
- Changes to transitional rules – they are amended to be in line with the primary amendments, but continue to apply to R&D assets acquired before the R&D Incentive in 2011.
- The Commissioner must publish information about R&D entities, where the entities have claimed notional deductions for R&D activities, which includes the amounts claimed.
Registration and R&DTI process
When first registering an entity, it will need to self-assess themselves against a selection criterion to determine whether they are eligible for the R&DTI and be deemed an R&D entity.
In order to be classified as a ‘R&D entity’ the entity it must either be:
- Incorporated under an Australia law e.g. Corporations Act 2001 (Cth); or
- Incorporated by foreign law but an Australian resident for income purposes; or
- Incorporated under a foreign law and you are:
- A resident of a country with which Australia has a double tax agreement that includes a definition of ‘permanent establishment’;
- Carrying on business in Australia through a permanent establishment as defined in the double tax agreement.
- The R&D entity must register its entity with AusIndustry to be eligible for the R&DTI. Once the application is reviewed and if found to be approved, your entity will be given a registration number to lodge a request for the R&D Incentive.
- The R&D entity must summarise its eligible expenses by lodging it with the ATO’s R&D incentive schedule. Your registration number must be included.
Part of the application requires you to describe your projects and activities. The registration must be done within 10 months of the income year-end and be lodged with the entity’s company tax return.
[Poynton Partners website – R&D Article – 7 July 2021]