The New Research & Development Tax Credit: What does this mean for you?
The Federal Government recently released the draft legislation for the new R&D Tax Credit. The draft legislation significantly increases the benefit of the R&D concession, particularly for companies with group turnover below $20 million. However, the draft legislation also makes it considerably more difficult to access the concession.
The legislation is intended to replace the existing R&D Tax Concession from 1 July 2010. The existing R&D Tax Concession is still available for the 2009/10 year.
The benefits of the changes
Companies with a group turnover less than $20 million
Companies will be eligible for a 45% refundable credit (a cash rebate that is paid even if the company is in a tax loss and cannot benefit from tax deductions). There is no limit on the amount of expenditure that can be claimed.
Currently companies with tax losses can only obtain a cash refund if they have a group turnover of $5 million or less and aggregate R&D expenditure of $2 million or less. If they exceed either of these limits they can only benefit by additional income tax deductions which only provide a cash benefit if the company has taxable income.
For example, a group with a turnover of less than $20 million with $1 million of R&D will receive a cash rebate of $450,000 whereas under the current rules the rebate would usually be $375,000.
Companies with a group turnover greater than $20 million
Companies will be eligible for a 40% non-refundable credit against their tax liability. This is equivalent to a 133% tax concession (currently the concession is usually 125%).
In some circumstances, Australian branches of foreign companies operating in Australia can claim the R&D Concession. Under the current rules branches cannot claim the concession.
The cost of these incentives is intended to be funded by a tighter definition of eligible R&D activities which will restrict its availability.
Measures to tighten the definition of R&D
R&D continues to be divided into two categories, Core R&D and Supporting R&D.
The Bill proposes to change the definition of Core R&D to an activity that involves both innovation and high levels of technical risk. Under the current rules, R&D activities only have to involve innovation or high levels of technical risk.
Four new tests are proposed to be added to the definition of Core R&D to:
- narrow the type of activity that is eligible to be an R&D activity;
- increase the degree of innovation required for an activity to be R&D;
- increase the level of technical risk required; and
- narrow the definition of the required purpose of the R&D activity.
The definition of Supporting R&D has been narrowed by requiring the activities to have a dominant purpose of supporting the Core R&D activity.
Computer Software
In house software is excluded from being an R&D activity unless the software development is for the purpose of making a profit from the supply of software to at least two unrelated persons. For example, if the software allows the company to sell music to customers, the R&D concession could not be claimed unless the company earned a commercial return on the sale of the software rather than the sale of the music.
Software services, other than software development, and integrating off the shelf software/open source software are excluded from the definition of R&D.
Feedstock rule
Where the R&D activity directly produces output a feedstock adjustment operates to reduce the R&D by the value of the output. For example, if a coal miner used a new process to mine coal the market value of coal extracted by that process is deducted from the cost of the R&D activity. To do this the value of coal from that part of the mining process (as opposed to the other mining processes) needs to be determined; this will create significant compliance costs.
The above is a summary of some of the more significant proposed changes. There are many other amendments which could affect your business. If you have any questions regarding the R&D incentive please contact Howard Badger on (02) 8238 7718 or your Moore Stephens relationship partner.
This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2009 Moore Stephens Australia Pty Limited. All rights reserved.
