R&D Tax Rate Cut – but it’s not all bad news

As announced by Government in September, the Budget Savings (Omnibus) Bill 2016 passed Senate giving rise to a 1.5% cut to the R&D Tax offset for both small and large companies. The good news is that this cut only applies to tax years commencing on or after 1 July 2016 compared with the original proposal which was to apply from 1 July 2014.

Given the timing of SME tax cuts also come into play, this newsletter unlocks the impact of the R&D tax rate changes by size of firm over the past, current and future years so that clients are fully aware of the impact for budgetary reasons.

Tax year 2015-2016

1/ Companies with an aggregated turnover up to $2 million:

a) R&D companies with an aggregated turnover of up to $2 million in tax loss (i.e. with sufficient tax losses to cash out against R&D expenses claimed) are eligible for a cash reimbursement of 45% against eligible R&D expenses claimed.

b) R&D companies trading in profit are entitled to a net (after tax) benefit of 16.5 cents for every $1 spent on R&D for the 2015/16 year only (i.e. refundable tax offset 45% less corporate tax rate 28.5% = 16.5%). This is due to the company tax rate reducing to 28.5% for companies with turnover of less than $2 million commencing from 1st July 2015 and the R&D Tax Incentive rate cut only starting on 1 July 2016.

c) For R&D companies with small profits or losses before tax in comparison to their R&D spend, the R&D tax benefit may be a mix of the 45% refund and 16.5% tax offset.

2/ Companies with aggregated turnover between $2 million and less than $20 million:

a) R&D companies trading in tax loss (with sufficient tax losses to cash out against R&D expenses claimed) are eligible for a cash reimbursement of 45% against eligible R&D expenses claimed.

b) For R&D companies trading in profit the rate of return is 15% of R&D expenses claimed, this offset is used to reduce any company tax payable before any balance is refunded by the ATO.

c) For R&D companies with small profits or losses before tax in comparison to their R&D spend, the R&D tax benefit may be a mix of the 45% refund and 15% tax offset.

3/ Companies with aggregated turnover of $20 million or more:

The R&D tax offset is equal to a 10% non-refundable offset for companies with an aggregated turnover of $20 million or more. The offset can only be used to reduce the amount of tax payable or it may be carried forward into future years. Additionally, from 2014/15 onwards, the Government also capped the annual quantum of R&D expenses that can be claimed by any company to $100 million, therefore capping the total annual benefit for large companies at $10m.

Tax year 2016-2017

1/ Companies with an aggregated turnover of up to $2 million

a) R&D companies with an aggregated turnover of up to $2 million trading in tax loss (i.e. with sufficient tax losses to cash out against R&D expenses claimed) are eligible for a cash reimbursement of 43.5% against eligible R&D expenses claimed.

b) R&D companies trading in profit are entitled to a net (after tax) benefit of 15 cents for every $1 spent on R&D for the 2016/17 year (i.e. refundable tax offset 43.5% less corporate tax rate 28.5% = 15%).

c) For R&D companies with small profits or losses before tax in comparison to their R&D spend, the R&D tax benefit may be a mix of the 43.5% refund and 15% tax offset.

2/ Companies with aggregated turnover between $2 million and less than $20 million:

a) R&D companies with an aggregated turnover of less than $20 million trading in tax loss (i.e. with sufficient tax losses to cash out against R&D expenses claimed) are eligible for a cash reimbursement of 43.5% against eligible R&D expenses claimed.

b) For R&D companies with aggregated turnover of between $2m and less than $20 million trading in profit the rate of return is 13.5% of R&D expenses claimed, this offset will be used to reduce any company tax payable before any balance is refunded.

c) For companies with small profits or losses before tax in comparison to their R&D spend, the R&D tax benefit may be a mix of the 43.5% refund and 13.5% tax offset.

3/ Companies with aggregated turnover of $20 million or more:

The R&D tax offset is equal to an 8.5% non-refundable offset for companies with an aggregated turnover of $20 million or more. The offset can only be used to reduce the amount of tax payable or it may be carried forward into future years.

Possible impact on R&D rates of return against proposed company tax cuts:

The government has announced its intention to continue to reduce the corporate tax rate, if they do the impact to the R&D Tax benefit will be:

1/ Companies with an aggregated turnover of up to $10 million

a) R&D companies with an aggregated turnover up to $10 or even $20 million, trading in tax loss (i.e. with sufficient tax losses to cash out against R&D expenses claimed) will still be eligible for a cash reimbursement of 43.5% against eligible R&D expenses claimed.

b) If the bill to reduce the company tax rate to 27.5% for companies with aggregated turnover of less than $10 million is passed by Senate the R&D tax benefit will increase the effective offset from 13.5% to 16% for R&D companies trading in profit of their R&D spend for 2016/17 and subsequent years.

c) R&D companies with annual aggregated turnover of between $10 million and less than $20 million will continue to receive a 13.5% benefit as no tax cuts are planned for this sector until later years.

d) For companies with small profits or losses before tax in comparison to their R&D spend, the R&D tax benefit may be a mix of the 43.5% refund and either 16% or 13.5% tax offset depending on annual aggregated turnover.

2/ Companies with aggregated turnover over $20 million:

There is unlikely to be any change for these companies who will continue to receive an 8.5% non-refundable tax offset.

Please note: the ATO will reduce the amount of the refund by any other taxes owed by the R&D company at the time of assessing its tax return.

Gerry Frittmann 

Managing Director 

Mob: 0413 647 664

gerry@tcf.net.au

NSW Head Office

Tel: (02) 8219 4900

Email: info@tcf.net.au

PO Box 111, Rosebery NSW 1445

VIC Office

Tel: (03) 9629 7772

Email: info@tcf.net.au

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