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Many stakeholders in the Start-up and Innovation Funding sector were delighted to see the Morrison Government enhance the value of the R&D Tax Incentive program by committing to additional investment in its 2020 Budget over the forward estimates period.
That is to say, that the Refundable R&D Tax Offset rate has been significantly increased, and the Non-Refundable R&D Offset benefit has, at the very least, been maintained.
In so doing, the Government has abandoned its controversial plan to cut $1.8 billion from the program in an acknowledgment that business investment in research and development will be a critical element in the post-COVID economic recovery. Such a view is obviously shared by the major parties because the legislation enacting the R&D tax boost was swiftly passed by Parliament last Friday without amendment.
The changes will take effect from 1 July 2021 and are expected to support more than 11,400 businesses both large and small.
For small companies turning over less than $20 million, the Refundable R&D Tax Offset will be increased to 18.5 per cent above the claimant’s corporate tax rate, and the $4 million cap on annual cash refunds will not proceed.
For larger claimants turning over more than $20 million, the much maligned and complex R&D intensity test for the Non-Refundable R&D Tax Offset has been simplified by being reduced from three to two tiers. Moreover, the rates for these two tiers have been increased with an R&D intensity of 0–2% under Tier 1, which is now attracting an additional tax offset of 8.5% (which is on a par with the current non-refundable value proposition). Those companies that commit a greater proportion of their business expenditure to R&D — i.e. those characterized by R&D intensities in excess of 2% — will be far better-off under the changes by being entitled to a 16.5% tax offset on the increment of R&D expenditure above the 2% threshold.
Offset rates in FY22
In essence, the new reforms will decouple the R&D Tax Offset rate from the company tax rates, fixing the Refundable R&D Tax Offset rate at 18.5 per cent, and the Non-Refundable R&D Tax Offset rate at 8.5% or 16.5% over the prevailing corporate tax rate (depending upon the claimant’s R&D intensity level).
The effect of this decoupling is that R&D tax claimants will no longer see incremental increases in their net R&D benefit arising from the falling of corporate tax rates. For example, the maximum tax benefit under the Refundable R&D Tax Offset will remain at 43.5 cents in the R&D dollar in FY22 when these changes first take effect. This 43.5 cent benefit being made up of the 25 per cent corporate tax rate that will be applicable to base rate entities in that year plus the additional 18.5 per cent Refundable R&D Tax Offset. This is but a minor consideration in the scheme of things and a small price to pay for greater certainty of investment in and quantifiable benefit for business investment in research and development.
We’ll be exploring the import of all other key changes in our upcoming blog posts including the introduction of a uniform clawback rule, as well as the proposed improvements to the administration, integration and transparency of the program.