R&D Tax Incentive – R&D proposed changes released – $150m threshold, offset at corporate rate plus 13.5% points, $4m cap, higher intensity

On 8 May 2018, the Government announced it will reform the Research and Development Tax Incentive (R&DTI) to better target the program and improve its integrity and fiscal affordability in response to the recommendations of the 2016 Review of the R&D Tax Incentive.  And on 29 June 2018, Treasury released its consultation material:

1. A Consultation Paper;
2. A Draft Bill
3. A Draft Explanatory Statement.

These changes will apply for income years starting on or after 1 July 2018. The exposure draft legislation and associated explanatory materials outline the Government’s proposed implementation of the reforms.

The key measures would better target the R&D tax incentive by:

• increasing the R&D expenditure threshold from $100 million to $150 million and making the threshold a permanent feature of the law;
• linking the R&D tax offset for refundable R&D tax offset claimants to claimants’ corporate tax rates plus a 13.5% point premium;
• capping the refundability of the R&D tax offset at $4 million per annum; and
• increasing the targeting of the Incentive to larger R&D entities with high levels of R&D intensity.

They would also enhance the integrity of the Incentive:

• by ensuring R&D entities cannot obtain inappropriate tax benefits and by clawing back the benefit of the Incentive to the extent an entity has received another benefit in connection with an R&D activity.

And further, they would improve the administrative framework by:

• supporting the Incentive by making information about R&D expenditure claims transparent, enhancing the guidance framework to provide certainty to applicants and streamlining administrative processes.

The Government is seeking feed back on these measures.

COMMENTS are due by 26 July 2018.

[Treasurer’s website: Media Release; Treasury website: Consultation Page, Consultation Paper, Draft Bill, Draft EM; LTN 124, 2/7/18; KPMG 2.7/18; Tax Month – July 2018]

Study questions (answers available)

1. Does the proposal involve increasing the threshold from $100m to $150m?
2. Does the proposal involve the R&D offset being the corporate rate minus 13.5% points?
3. Does the proposal involve capping the offset at $4m?
4. Does the proposal include claw back of inappropriately claimed tax benefits?