R&D Tax Rate Cut – but it’s not all bad news
Newsletter | November 2016
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:
- 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.
- 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.
- 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:
- 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.
- 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.
- 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
- 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.
- 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%).
- 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:
- 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.
- 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.
- 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
- 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.
- 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.
- 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.
- 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.
– 1.5% R&D Tax Rate Cut –
Services
Ryan can assist with services such as:
- Scope your potential to claim various grant programs
- Assist with the preparation and lodgement of grant applications
- Review or provide a health check on your internally prepared grant applications
- Establish record-keeping practices as required under various grant programs
- Provide prepayment loans against future cash refunds under the R&D Tax Incentive
- Keeping industry informed on all new Government policy and grant initiatives
Don’t hesitate to give us a call.