After more than two years of uncertainty over the fate of the
new R&D Tax Credit (Tax Credit), the relevant
bills have been passed by Parliament with the support of the
crossbench senators and await Royal Assent. The new program
commenced on 1 July 2011 (instead of the original start date of 1
July 2010). As the new Tax Credit has a number of significant
differences to the former R&D Tax Concession, taxpayers should
analyse their arrangements in the light of these new rules.
Given that R&D is crucial to the life sciences sector in
Australia, the new R&D Tax Credit will be of particular
interest to taxpayers in this sector.
Overall, small businesses that conduct pure research are likely
to be the big winners under the Tax Credit and large taxpayers that
conduct R&D as a broader part of their commercial activities
are likely to be worse off than under the former R&D tax
concession. AusBiotech's CEO, Dr Anna Lavelle has described the
passing of the R&D bills as a 'momentous day for innovation
in Australia and the most significant positive news that the
industry has had for a number of years'.
Summary of the Tax Credit
The Tax Credit (replacing the R&D Tax Concession)
a 45% refundable R&D tax offset for taxpayers with a
turnover of less than $AU20 million
a non-refundable 40% R&D tax offset for all other
The 'object of (the Tax Credit) is to encourage industry to
conduct research and development activities that might otherwise
not be conducted because of an uncertain return from the
activities, in cases where the knowledge gained is likely to
benefit the wider Australian economy'. This is achieved by
'providing a tax incentive for industry to conduct, in a
scientific way, experimental activities for the purpose of
generating new knowledge or information in either a general or
There is a number of important aspects to the Tax Credit,
The Tax Credit applies to all income years starting on or after
1 July 2011.
The 40% and 45% offsets under the Tax Credit will result in
greater benefit for eligible R&D activities. In particular, the
45% refundable offset is broader than the refundable tax offset
under the former R&D tax concession (which only applied to
businesses with a turnover of less than $5 million).
The eligibility requirements for claiming R&D activities
have been tightened compared to the former R&D tax concession.
This is achieved through a narrower definition of 'core'
R&D activities for all businesses and imposing a dominant
purpose test on businesses in relation to particular
'supporting' R&D activities.
The Government has acknowledged that the new rules are likely
to limit claims by many large businesses (described as
'business as usual claims') and to benefit smaller firms
undertaking risky R&D activities ('genuine
According to Innovation Minster, Kim Carr, 'The R&D Tax
Credit will deliver more funding to innovative firms including
manufacturers, ICT and biotech'.
The types of entities eligible for the Tax Credit are broader
than the former R&D tax concession and include certain foreign
corporations and public trading trusts.
R&D activities conducted in Australia will be eligible
regardless of where the resulting intellectual property is held.
Once again, this is broader than under the former R&D tax
There is more opportunity under the Tax Credit to claim R&D
activities that take place outside Australia.
Quarterly payments are to be introduced for small and medium
businesses from 1 January 2014.
What should taxpayers do?
Now that the bills have been passed, taxpayers can start to
focus on the application of the new rules to their arrangements.
While the uncertainty regarding the status of the Tax Credit has
been resolved, some uncertainty remains about the new concepts and
provisions in the new legislation. Taxpayers now need to shift
their attention to the new rules and the impact those rules will
have on their businesses, including their entitlements under the
new rules and ensuring their contractual arrangements with its
customers and others (such as joint venture partners) do not
prejudice their entitlement to make claims under the new rules.
This publication is intended as a general overview and
discussion of the subjects dealt with. It is not intended to be,
and should not used as, a substitute for taking legal advice in any
specific situation. DLA Piper Australia will accept no
responsibility for any actions taken or not taken on the basis of
DLA Piper Australia is part of DLA Piper, a global law firm,
operating through various separate and distinct legal entities. For
further information, please refer to www.dlapiper.com
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