The R&D incentive reduces the tax that companies pay and sometimes even provides businesses with a cash refund if they’ve undertaken R&D eligible activities. The scheme is complex (you can speak to us if you think you might qualify), and proposed changes currently up for debate before the Senate won’t make it any simpler. If implemented, these changes could have a significant impact on companies that invest in R&D. The changes will take effect from July 1 2020, so make sure you’re on top of what these changes mean for your business.
Changes for small companies
If you’re a small company with turnover of less than $20 million, this is what you need to know:
1. The R&D offset rate will change from 43.5% to 13.5% plus the corporate tax rate. This will mean the offset rate is immediately reduced to 41%. That’s almost a 6% loss in the amount refunded.
2. The refundable component of the R&D offset will be capped at $4 million (excluding any clinical trials).
Claims will be gradually reduced over the next few years as corporate tax rates decrease. This is a major blow to new companies relying on the R&D incentive for cash flow in their early stages.
As an example, a loss-making company spending $500,000 on eligible R&D in 2018-19 would have received a refund of $217,500. If these changes go ahead, a loss-making company spending $500,000 on eligible R&D in 2019-20 will be refunded $205,000.
Changes for large companies
For large companies with turnover of greater than $20 million, the major change is the introduction of an R&D ‘intensity’ measure.
The current incentive is a 38.5% non-refundable tax offset. The proposed change is a scaled measure of how much a company invests in R&D. The R&D intensity is the company’s R&D expenses divided by its total expenses.
The R&D offset will be equal to the company’s income tax rate plus an R&D premium.
So for a company with R&D costs of $3 million and total company expenses of $30 million, the R&D intensity will be 10%. In 2018-19 they would have received an offset of $1.155 million. If these changes go ahead, the same company spending $3 million on eligible R&D in 2019-20 will receive an offset of $1.119 million.
What do these changes mean for innovation in Australia?
Australian companies have long considered the R&D incentive an easily accessible source of innovation funding. These changes will negatively impact almost every company that claims. That’s why businesses and industry groups from all sectors are publicly opposing these changes.
The Government risks stifling innovation in Australian businesses. Companies will be less motivated to keep their R&D onshore as they look for cheaper alternatives, and cash strapped start-ups will be forced to look for additional funding elsewhere.
If you’d like to discuss the full range of changes to the incentive and how it will impact your business, please get in touch for a complimentary review.