The new R&D tax incentive

On 12th May 2009 the Federal Government announced a new R&D tax incentive.  The stated objective of the change was to introduce a simplified R&D tax credit to provide a better incentive for business to invest in “research and innovation”.

Although the new incentive comes into effect on 1 July 2010, the exact form it will take is not yet fully known.  We expect draft legislation to be released before the end of this calendar year.

Recap of the existing R&D tax incentive
A tax deduction is available for eligible expenditure amounting to 125% of the expenditure for all claims made in 2009 and 2010. In some cases, an additional 50% deduction is available to businesses where the expenditure exceeds the prior three year average.  The incentive is not available for companies whose expenditure for the year is less than $20,000.

A refundable tax offset is available where the R&D expenditure does not exceed $1m, and the group turnover of the claimant does not exceed $5m.  The tax offset is applied against any outstanding tax debts with any excess refunded to the claimant.

The existing scheme is being maintained for the 2010 year, but the current R&D expenditure cap for the tax offset will be lifted from $1m to $2m.

Overview of the new R&D tax incentive
Companies, with a group turnover of less than $20 million will be able to access a 45% refundable tax credit.  It is expected that the 45% tax credit will first offset existing tax debts with any excess to be refunded (similar to the current tax offset).  Unlike the existing tax offset, there appears to be no maximum spending cap.

Companies that exceed the $20 million group turnover threshold will be able to access a 40% non-refundable tax credit.  Any excess can be carried forward to offset against future tax liabilities.

Where the IP is held by a foreign resident
A feature of the new incentive is the relaxation of the Australian IP ownership requirement.  This will allow greater flexibility for multinational groups managing IP development and ownership on a global basis.  Its intent is to encourage global groups to use Australia as a research base.

Under the new incentive, multinational groups will be able to own IP offshore and still claim the 40% non-refundable tax credit for R&D activities performed on that IP by Australian group companies.

Transitioning into the new R&D tax incentive
It is clear that the new incentive will be more generous compared to the existing system. However, there is concern that the tightening of the eligibility criteria may mean projects which currently qualify may become ineligible under the new rules.

Therefore, ongoing projects that continue into the new incentive will need to be managed appropriately.  If it is clear that existing projects will continue to qualify, then there may be a bias to defer activities into the more generous new incentive.  Conversely, if there is a risk of the project no longer qualifying, activity may be accelerated in the current year to complete the project before the new incentive commences.

On face value, the proposed R&D tax incentive is a welcome expansion on the existing system with more generous concessions for companies engaged in eligible R&D.

However, there is still uncertainty created by a perceived tightening of the eligibility criteria.  This makes it difficult to plan into the new incentive.  Until this is clarified, the key message is to monitor the situation closely so you can act quickly when the detail is released.

For more information on the new R&D tax incentive, contact your usual Grant Thornton advisor or:

Krish Patel 
Partner - Tax
T  +61 2 8297 2400
E  krish.patel@au.gt.com