The long-delayed R&D Tax Credit was passed by the House of Representatives yesterday after clearing the Senate with amendments.  The R&D Tax Credit represents the most significant change to tax innovation policy since the original R&D Tax Concession was introduced in 1986.

The R&D Tax Credit was announced as part of the 2009-2010 Federal Budget as a replacement for the R&D Tax Concession which provided companies with a deduction from taxable income based on their R&D expenditure.  One of the problems with the R&D Tax Concession was that it only benefited companies with sizable profits and did not help start-ups that were yet to turn a profit.

The new system is aimed at reducing complexity, cutting red tape and thereby providing a better incentive for business to invest in innovation.  The R&D Tax Credit will apply to expenditure incurred, and the use of depreciating assets, in income years commencing on or after 1 July 2011.

Operation of the new R&D Tax Credit

With the implementation of the R&D Tax Credit, more businesses will be eligible to benefit than under the original R&D Tax Concession.  The R&D Tax Credit will apply differently to small and large companies:

  • elligible companies with an annual turnover of less than $20 million (small companies) will be eligible for a 45% refundable tax credit on R&D expenditure, being equivalent to an accelerated tax deduction of 150%; and
  • eligible companies with an annual turnover of $20 million or more (large companies) will be eligible for a 40% non-refundable tax credit on R&D expenditure, being equivalent to an accelerated tax deduction of 133%.  

The refundable credit will result in refunds to small companies with tax losses, with the new law placing no limit on the amount of R&D expenditure incurred.  This will encourage start-ups to invest far more in R&D than under the original R&D Tax Concession.  The Treasurer has stated that around 5,500 small companies will benefit under the R&D Tax Credit.

Amendments secured by the Greens also mean that, from 1 January 2014, small companies may be eligible for quarterly credit payments, providing important cash flow options.

The R&D Tax Credit will also be available to a broader range of companies than the original R&D Tax Concession.  Companies that are Australian residents, foreign corporations that are residents of a country with which Australia has a double tax agreement and which carry on business through a permanent establishment in Australia, and public trading trusts with a corporate trustee will all be eligible.  In a departure from the original R&D Tax Concession, companies will be eligible for the credit even where the intellectual property related to the R&D is held off-shore.

Eligibility tests for R&D projects under the R&D Tax Credit will be narrowed under a new dominant purpose test, which is aimed to encourage investment in genuine R&D, rather than “business as usual” activities.  In-house software R&D will also be subject to a narrower eligibility test.

Continued application of the original R&D Tax Concession

The original R&D Tax Concession will continue to apply to all R&D expenditure in income years commencing before 1 July 2011.