Changes to the research and development (R & D) tax
incentive system are due to commence 1 July 2010. What expenditure
will qualify for the new concessions and incentives?
The Government announced the changes to the R&D tax
concession system in the 2009 Budget, and almost exactly one year
later, on 13 May 2010, the Tax Laws Amendment (Research and
Development) Bill 2010 and the Income Tax Rates Amendment
(Research and Development) Bill 2010 were introduced into
Parliament to implement the changes. The Bill will repeal the
existing R & D provisions in the 1936 Tax Act and introduce a
new Division 355 in the 1997 Tax Act. The administrative rules and
the role of Innovation Australia will be set out in a new Part III
of the Industry Research and Development Act 1986.
It's been a bumpy ride for the government with heavy
criticism of its first draft of the legislation forcing it to
re-think and redefine what R & D will be eligible for the
What will the new system involve?
The new system will provide a refundable tax credit equal to 45
per cent of expenditure on R & D to companies with an annual
turnover of less than $20 million. For companies which exceed the
$20 million turnover threshold a tax credit equal to 40 per cent of
expenditure on R & D will be available, but it will not be
At first glance it appears that the new system will cost the
Government more money, as a greater level of concession will be
available, and, for small companies, the tax credit is refundable
and therefore available even if the company is in a loss position.
However, the Government stated that the new system would achieve
revenue neutrality, despite the increase in the concessions, by
tightening the definition of eligible R & D.
What R & D will qualify?
The first exposure draft of the legislation required R & D
to be both innovative and involve technical risk in order to
qualify for the tax rebate. Software development was cut out of the
definition of R & D. However, these measures were heavily
criticised, with allegations that such a restrictive approach would
place the Government in a revenue positive position.
The legislation introduced into Parliament on 13 May contains an
entirely new definition of "Core R & D". Core R &
D activities are experimental activities:
"whose outcome cannot be known or determined in advance on
the basis of current knowledge, information or experience, but can
only be determined by applying a systematic progression of work
that (i) is based on principles of established science; and (ii)
proceeds from hypothesis to experiment, observation and evaluation,
and leads to logical conclusions, and
that are conducted for the purpose of generating new knowledge
(including about the creation of new or improved materials,
products, devices, processes or services)."
There is a list of items that are not Core R
& D activities. Software development activities will not be
eligible core R & D where the software is developed for the
dominant purpose of internal business administration by the entity
(or connected entities) for which it was developed, modified or
customised. Otherwise, software development is able to qualify.
Supporting R & D is also eligible for the tax rebate
provided the activities are directly related to core R & D
activities or are undertaken for the dominant purpose of supporting
core R & D activities.
What are the problems?
The "dominant purpose" test for supporting R & D
has been criticised as, in a commercial context, the dominant
purpose is rarely one of furthering knowledge – one eye
is always kept on the bottom line.
Federal Innovation Minister Kim Carr stated that the
lion's share of the current benefits are enjoyed by only
100 companies and the aim of the new system is to broaden access to
the concession. It remains to be seen whether the introduction of
an entirely new definition of R & D will achieve this goal.
The Norton Rose tax team can advise you regarding the new R
& D tax incentive system.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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