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Controversial R&D Tax changes reintroduced

CONTROVERSIAL R&D TAX  CHANGES REINTRODUCED  

The contentious changes announced in the 2018 May budget to reduce the benefits available under the R&D Tax Incentive have been re-introduced with only minor amendments despite having been rejected by members of both sides of Parliament in the prior Senate Economics committee hearings. The main message is that any changes will not affect the current 18/19 R&D claims being processed and if the changes are passed they will be introduced from the 19/20 financial year onward.

The table below provides a comparison of the key features between the new and current law.

Comparison of key features of new law and current law

 

The expenditure threshold

NEW LAW: The R&D expenditure threshold is increased to $150 million.

CURRENT LAW: The R&D expenditure threshold applies to eliminate the incentive component of the R&D tax offset in relation to notional deductions in excess of $100 million.

NEW LAW: The R&D expenditure threshold is a permanent feature of the law.

CURRENT LAW: The R&D expenditure threshold is legislated to cease on 1 July 2024.

NEW LAW: The R&D expenditure threshold is a permanent feature of the law.

CURRENT LAW: The R&D expenditure threshold is legislated to cease on 1 July 2024.

The R&D Tax Offset for small R&D entities

NEW LAW: R&D entities with aggregated turnover of less than $20 million are generally entitled to an R&D tax offset rate equal to their corporate tax rate plus a 13.5 per cent premium.

CURRENT LAW: R&D entities with aggregated turnover of less than $20 million are generally entitled to an R&D tax offset rate of 43.5 per cent.

NEW LAW: The amount of a refund that an R&D entity can receive is capped at $4 million per annum.

NEW LAW: Offset amounts that relate to expenditure on clinical trials do not count towards the cap and remain refundable.

CURRENT LAW: R&D entities with aggregated turnover of less than $20 million are entitled to a tax refund for any R&D tax offset they receive in excess of their income tax liabilities.

The R&D Tax Offset for companies over $20 million turnover

NEW LAW: R&D entities with aggregated turnover of $20 million or more are entitled to an R&D tax offset equal to their corporate tax rate plus a premium based on the level of their incremental R&D intensity for their R&D expenditure.

CURRENT LAW: R&D entities with aggregated turnover of $20 million or more are entitled to a non-refundable R&D tax offset at a rate of 38.5 per cent.

R&D Intensity

Intensity Premium

Notional deductions greater than 4% and up to and including 9% of total expenses  4.5%

Notional deductions greater than 4% and up to and including 9% of total expenses  8.5%

Notional deductions greater than 9% of total expenses  12.5%

 

Schemes to obtain an R&D tax benefit​

NEW LAW: The Commissioner may also deny a tax benefit in the form of an amount of a refundable or non-refundable R&D tax offset that an R&D entity seeks to obtain from a tax avoidance scheme.

CURRENT LAW: The Commissioner may deny a tax benefit in the form of a deduction or notional deduction that an R&D entity seeks to obtain from a tax avoidance scheme.

The uniform clawback rule

NEW LAW: Recoupment amounts and feed-stock adjustments give rise to an amount of assessable income equal to the grossed-up value of the incentive component of associated amounts of R&D tax offset.

CURRENT LAW: Recoupment amounts are subject to a standalone tax of 10 per cent.

CURRENT LAW: One third of feed-stock adjustments are included in an R&D entity’s assessable income.

NEW LAW: An amount is included in the assessable income of the R&D entity that received or is entitled to the R&D tax offset in relation to a recoupment amount or feed-stock revenue received by a related entity.

CURRENT LAW: In cases involving related entities, the entity receiving a recoupment is subject to recoupment tax.

CURRENT LAW: In cases involving related entities, the R&D entity entitled to the R&D tax offset is subject to a feed-stock adjustment if the related entity receives feed-stock revenue.

Balancing adjustments for R&D assets

NEW LAW: The R&D entity’s assessable income is increased by an amount equal to the grossed-up value of the incentive component of the associated amounts of R&D tax offset.

CURRENT LAW: For an R&D asset held only for R&D purposes where the balancing adjustment amount is included in the R&D entity’s assessable income – the amount is generally increased by one third.

CURRENT LAW: For an R&D asset held partially for R&D purposes where the balancing adjustment amount is included in the R&D entity’s assessable income – the R&D component of the amount is generally increased by one third.

CURRENT LAW: For an R&D asset held only for R&D purposes where the balancing adjustment amount is allowed as a deduction – the deduction is included in the R&D entity’s R&D tax offset calculation.

NEW LAW: The R&D entity is entitled to a deduction equal to the grossed-up value of the incentive component of the associated amounts of R&D tax offset that would have been obtained if the R&D component of the balancing adjustment amount was included in the calculation of the offset.

CURRENT LAW: For an R&D asset held partially for R&D purposes where the balancing adjustment amount is allowed as a deduction – the R&D component of the amount is increased by one third or (for small R&D entities) or one half

NEW LAW: Similar amended rules apply to balancing adjustments for R&D assets held by R&D partnerships.

CURRENT LAW: Similar rules apply to balancing adjustments for R&D assets held by R&D partnerships.

NEW LAW: The transitional rules are amended in line with the primary amendments but continue to apply to R&D assets acquired before the introduction of the Incentive in 2011.

CURRENT LAW: Transitional rules apply to R&D assets acquired before the introduction of the Incentive in 2011.

Should you wish to discuss this matter further, please don’t hesitate to contact Gerry Frittmann on 02 8219 4900 or email gerry@tcf.net.au

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