R&D Tax Incentive - Update on proposed changes for SMEs and Startups

Updated: Oct 22, 2018

In May 2018, the Australian Government announced their intention to update the R&D Tax Incentive Scheme. The changes were put forward in an effort to improve the program’s integrity by tightening qualifying rules and increasing resources for compliance activities.

The Government estimates changes will result in a net gain to the budget of $2.4 billion over the next 4 years.

As of October 2018, legislative changes have not passed in parliament. The bill is currently being debated by The House of Representatives. After the bill is passed by the House of Representatives it will proceed to the Senate for debate.

The changes, if passed by law, will apply for income years starting on or after 1 July 2018.

Below, we re-review the implications of the changes to small business owners specifically.

Summary of changes for SMEs and startups

1. Cash refund capped to $4 million per year

The government introduced a $4 million annual cap on cash refunds for R&D claimants with aggregated annual turnover of less than $20 million. Eligible amounts above the cap will become non-refundable tax offset and the balance to be carried forward into future income years.

The $4 million cap on cash refunds excludes clinical trials.

2. Refundable R&D tax offset rate

Companies with an aggregated annual turnover below A$20 million will be entitled to the R&D offset rate at 13.5% above their company tax rate (i.e. 43.5% for a 30% company tax rate and 41.0% for a 27.5% company tax rate).

The new changes mean companies who currently pay 27.5% as their company tax rate will be entitled to 2.5% less in their refundable tax offset.

3. Increased Compliance Activity

In an effort to reduce fraudulent claims, greater compliance and definition tightening will be introduced. Changes will include strengthening the anti-avoidance rules, publishing the company names and R&D spend amounts as well as additional resourcing focusing on identifying ineligible R&D activities. The changes will increase public accountability and transparency.

4. Clearer Guidance

Innovation and Science Australia will produce public findings on the scope of what is eligible R&D. The findings will provide greater clarity to eligible activities and reduce unintentional misinterpretations.

Impact of the Changes

Example 1 - Widget Co

Aggregated turnover: <$20 million

Company Loss: -$200,000

Eligible R&D expenditure: $300,000

Existing Rules

Widget Co would be entitled to a cash refund of $130,500

(43.5% x $300,000).

Proposed Rules

Widget Co Co will be entitled to a cash refund of $123,000 (41% of $300,000) because of the ordinary corporate tax rate of 27.5%.

Example 2 - Bio Co

Aggregated turnover: <$20 million

Company Profit: $150,000

Eligible R&D expenditure: $200,000

Existing Rules

Bio Co would be entitled to a reduction in tax liability of $32,000.

[$200,000 x (43.5%-27.5%)]

Proposed Rules

Bio Co will be entitled to a reduction in tax liability of $27,000.

[$200,000 x (41%-27.5%)]

For more information get in touch or visit the government budget 2018-19 page.