The federal government has opened its consultation for amendments to the R&D tax incentive, as it prepares to implement the legislative changes announced in the 2018 budget in May.
The reform comes in response to a review of the R&D tax incentive in 2016, when it was decided the incentive “did not fully meet its policy objectives”.
In the budget, the government announced a $4 million cap on cash refunds available to companies with annual turnovers of less than $20 million.
The new draft legislation clarifies that, for startups with annual turnover of less than $20 million, refundable R&D offsets will be 13.5 percentage points above the claimant’s company tax rate.
For companies with annual turnover of more than $20 million, the draft introduces incremental rates of non-refundable R&D tax offsets, depending on the proportion of the company’s expenditure that goes on R&D.
Those that spend less than 2% of their business expenses on R&D can only claim a tax offset of four percentage points (above their company tax rate) of their R&D expenditure.
For companies spending between 2% and 5% of total business expenses on R&D, they can claim an offset of 6.5%. It is only when the proportion of R&D expenditure reaches between 5% and 10% that the offset at 9% exceeds the previous level.
For large companies spending in excess of 10% of business expenses, the spending above 10% can be offset at 12.5%. This will potentially increase the value of the concession for those companies, compared to previous years, and could prove to be a significant benefit to larger startups with more than $20 million in turnover, which were previously limited to a 38.5% offset on their expenditure.
The offset (unlike the cash refund) is only of benefit to companies generating profits.
The draft legislation also notes that R&D tax offsets that cannot be refunded will be carried forward as non-refundable tax offsets for future income years.
The changes also seek to improve transparency within the program, enabling the Australian Tax Office to disclose claimant details, and the amount of R&D expenditure they have claimed.
In February last year, the ATO warned startups to be honest about their R&D tax incentive claims, issuing a warning about the eligibility of some R&D activities.
The consultation paper says the government is looking for specific feedback on its method for calculation of R&D intensity, and a process for implementing a clinical trials exemption under the $4 million cap.
The consultation is open until 26 July, and the final legislation will apply to all business years starting on or after July 1 2018.
A government statement released on the day the budget said changes to the tax incentive were intended to “crack down” on claims that push the boundaries of the scheme, “with enhanced integrity, enforcement and transparency arrangements”.
Although the $4 million cap is an improvement on the original $2 million proposed in the R&D Tax Review in 2016, it still prompted concerns from within the industry that some startups, such as biotech startups, would easily pass the cap every year, due to the high R&D spends associated with their sector.
Speaking to StartupSmart in April, StartupAus chief executive Alex McCauley called the program “the best scheme of its kind in the world”, and warned restrictions could lead to startups moving their R&D activity overseas.
“This is the single most important program any government in any country delivers for their startups. It’s a hugely valuable program that has kept a lot of Australia’s best companies in Australia for their R&D work,” he said.