These measures, which are contained in the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 (Cth), have already passed through Parliament and apply to income years starting on or after 1 July 2021.
The Government's incentives for companies to invest in R&D take three key forms:
- Scrapping the previously-announced $4 million cap on annual cash refunds for companies with aggregated annual turnover of less than $20 million;
- Reducing the number of intensity tiers and increasing the non-refundable R&D tax offset rates for companies with aggregated annual turnover of $20 million or more; and
- Increasing the R&D expenditure threshold from $100 million to $150 million per annum.
Together, these measures represent significant incentives for private investment in R&D: they are estimated to cost $2 billion in fiscal balance terms over the forward estimates period. Cognisant of potential abuse of this expanded scheme, the Government has also enacted several measures to improve the integrity of the R&D tax incentives.
The Federal Government is also increasing its public investment in R&D by earmarking an additional $459.2 million over the four years from 2020-21 to CSIRO to ensure it is able to continue essential scientific research.
Changes to offset rates and intensity tiers
As with the pre-amendment R&D Tax Incentive rules, the new rules distinguish between large and small taxpayers. Small taxpayers have aggregated turnover of less than $20 million per annum (higher than the threshold of $10 million for some other concessions). Large taxpayers are those that have aggregated turnover of $20 million or more per annum. Aggregated turnover includes the turnover of the entity claiming the concession and certain related or affiliated entities, including foreign entities.
The new rules will also treat any small taxpayer that is controlled by one or more exempt entities as being a large taxpayer for the purposes of the R&D Tax Incentive.
For small taxpayers, the refundable R&D tax offset rate has been changed from a flat rate of 43.5% to a premium of 18.5 percentage points on top of their corporate tax rate. Refundable R&D tax offsets are applied after all other tax offsets, other than those arising from franking deficit tax, and may be refunded to small taxpayers if their tax offsets exceed their tax payable. The Government had previously announced that refundability would be limited to $4 million. The Budget announcement that this limit will be scrapped, without ever having been implemented, will be welcomed by R&D start-ups.
For large taxpayers, the non-refundable R&D tax offset was (pre-amendment) available at the rate of 38.5%. Now, the rate is their corporate tax rate plus the R&D premium. Non-refundable R&D tax offsets are applied before refundable tax offsets and may be carried forward to later years.
The R&D premium, applicable to large taxpayers, ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenses for the year (i.e. how much it spends on R&D as a proportion of its total expenses).
Previously, as part of the 2019-20 MYEFO, the Government announced that the number of previously announced intensity tiers would reduce from four to three, so that the marginal R&D rate would be the claimant's company tax rate plus:
- 4.5 percentage points for R&D expenditure between 0-4% R&D intensity;
- 8.5 percentage points for R&D expenditure above 4-9% intensity; and
- 12.5 percentage points for R&D expenditure above 9% intensity.
The Government has now streamlined these intensity tiers from three to two, to provide greater certainty for R&D investment while still rewarding those companies that commit a greater proportion of their business expenditure to R&D. The marginal R&D rate will now be the claimant's company tax rate plus:
- 8.5 percentage points for R&D expenditure between 0-2% intensity; and
- 16.5 percentage points for R&D expenditure above 2% intensity.
For both small and large taxpayers, the expenditure threshold has been increased from $100 million to $150 million per annum. This means the R&D Tax
Incentive does not apply to R&D expenditure above $150 million in a given year.
The start date for these changes has been further deferred to income years starting on or after 1 July 2021 (previously on or after 1 July 2019) on the basis that it will provide businesses with greater certainty as they navigate the economic impacts of the COVID-19 pandemic.
New anti-abuse measures
While the headline of the Government's R&D-related measures has been on its more generous offset rates and intensity tiers, the Government has also implemented stricter integrity rules to ensure the R&D Tax Incentives are not abused.
The most significant of these integrity rules are new clawback provisions, which claw back the R&D Tax Incentives to the extent they are attributable to "a government recoupment". Importantly for many entities which engage in R&D, the Explanatory Memorandum expressly contemplates that this will include government research grants.
The Government has also extended the concept of a "tax benefit" in the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 (Cth) to specifically include R&D tax offsets. This means the Commissioner of Taxation may deny a R&D tax offset that an R&D entity seeks to obtain from a tax avoidance scheme.
Conclusion
At a time when economic conditions might otherwise lead to businesses reducing their R&D expenditures, the Government's changes to the R&D Tax Incentives constitute generous incentives for businesses to continue investing in R&D from the 2021-22 income year.
However, the Government has effectively balanced these incentives with new specific and general integrity measures which could particularly impact entities which receive government grants.
Businesses who engage in R&D should seek legal advice regarding the most appropriate ways to navigate the newly-expanded R&D Tax Incentives with the new anti-abuse measures.