Updated draft R&D legislation released

On Thursday 1 April, the Federal Government released updated draft legislation for the proposed new R&D tax incentive. The updated draft represents a substantial relaxing of the controversial eligibility criteria as a result of wide spread industry backlash.

The main changes to the previously released draft legislation include:

Definition of core R&D activities
The new proposed definition of core R&D activities will require that they are experimental activities:

• the outcome of which 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:
• is based on principles of established science; and
• proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions
• are conducted for the purpose of generating new knowledge (including knowledge about the creation of new or improved materials, products, devices, processes or services).

The previously proposed definition of core R&D activities required that the activities involve, amongst other things, “considerable novelty and high levels of technical risk”. This was a strict requirement that would have meant that most activities would not have qualified as core R&D activities for the purposes of the new R&D tax incentive.

Supporting R&D activities
The dominant purpose test for supporting R&D activities will only apply to production activities or activities on the exclusions list. All other, non-production related activities will only be required to directly relate to the core R&D activities.

Software R&D
One of the biggest losers under the first draft was the software industry. The proposed changes were going to substantially impact R&D support for software developers.

Under the new draft, most software development will now qualify as eligible R&D provided the standard eligibility criteria are met. However, software development for in-house use will remain ineligible.

The feedstock rule will not be augmented
The feedstock rule, as it applies under the current R&D tax concession, will be effectively retained.

The augmented feedstock rule proposed under the first draft of the legislation was confusing and there was uncertainty in relation to the quarantining of expenditure that it required. It appeared that it would effectively only provide a benefit in relation to unsuccessful or loss making activities. 

It is still the Government’s intention that the new R&D tax incentive apply from 1 July 2010. It is therefore imperative that companies undertaking R&D plan their transition into the new system.  To assist with this, we will be holding briefings in relation to the new R&D tax incentive in the near future.

For more information on the recently updated draft R&D legislation , contact your usual Grant Thornton advisor or:

Krish Patel
Partner - Tax
T  +61 2 82967 2400
E  krish.patel@au.gt.com