As part of the 2014–15 Federal Budget, the Treasurer announced last night that, from 1 July 2014, the Government will reduce the rates of the Research and Development (R&D) tax offsets by 1.5 percentage points.

Consistent with the Government's commitment to reduce the company tax rate from 1 July 2015, this reduction in the offset will retain the relative value of the R&D tax incentive to companies.

It is worth noting that the reduction in the rate of the R&D tax incentive will come into force a full 12 months prior to the  decrease in the corporate tax rate.

The rates of the R&D tax offset are  to be reduced as follows:

  • the refundable R&D tax offset for companies with an annual aggregated turnover of less than $20 million will be reduced from 45 per cent to 43.5 per cent;
  • the non-refundable R&D tax offset for companies with an annual aggregated turnover of at least $20 million to less than $20 billion will be reduced from 40 per cent to 38.5 per cent.

Companies with an annual aggregated turnover of at least $20 billion may not eligible for the R&D tax offset (legislation currently before the Senate).

What this means:

 Click here to view the table.     

This reduction in the rate will affect the companies accessing the refundable rate, that is, those who are not paying tax and therefore not accessing the reduction in company tax rate as a whole. These companies will see a 1.5 percent reduction in their benefit. For companies in this position, despite the reduction in the rate, the tax  incentive can still  be meaningful in assisting cash flow for R&D activities.

This reduction will have a minimal effect for companies currently receiving the non-refundable tax credit due to the reduction in their overall company tax rate.

What companies need to do:

Continue to record your R&D activities and expenditure and retain documentation to support your claim. The requirements and administration of the scheme are unchanged.