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Five things that will change with the new R&D Tax Incentive
(Please note that on the 2nd September 2011, Senator Kim Carr announced that the R&D Tax Credit would be renamed the R&D Tax Incentive)
While it seems like an eternity since it was first announced, the new R&D Tax Incentive has finally been passed. So what does that mean for your garden-variety, joe-average company plugging away at research and development?
The R&D Tax Incentive is the key support mechanism used by the government to assist businesses undertaking R&D in Australia. The new program will apply retrospectively from 1 July 2011 and replaces the R&D Tax Concession.
For a long time the R&D Tax Concession only provided a benefit for those already doing R&D, but now, the new R&D Tax Incentive has the ability to actually drive and encourage new innovation that would otherwise not have been undertaken.
The new R&D Tax Incentive will provide a greater benefit for companies undertaking R&D, especially start-ups at the leading edge of innovation in Australia.
In the first year of the program, 2011-12, the government has allocated a total funding pool of $1.8 billion. Most importantly though, the program is an entitlement and eligible applicants can be sure to receive a benefit as long as they qualify - it's not competitive.
So what's different?
1. Larger companies can access the R&D Tax Incentive
The R&D Tax Incentive will allow larger companies, with a turnover up to $20 million and in losses, to potentially access a cash return. This means a lot more companies can now access the R&D Tax Incentive than those that were able to access the R&D Tax Concession.
2. The R&D Tax Incentive will be decoupled from the corporate tax rate
Because the R&D Tax Incentive will be decoupled from the corporate tax rate, the level of the Credit remains the same even if corporate tax rates drop. So if corporate tax rates go down to 29% or 28%, the R&D Tax Tax Incentive will still remain at 45 cents (or 40 cents for R&D entities with turnover of more than $20 million) for every dollar of eligible R&D expenditure regardless of the prevailing company tax rate.
3. The rate of benefit will rise
Currently the R&D Tax Concession has a rate of 37.5%, so if you spend $100k on R&D and you're in loss, then you can get $37,500 cash back from the government. With the advent of the new R&D Tax Incentive, that rate goes up to 45% and your cash benefit would be $45,000 in the above scenario, a significant increase. Even if you are looking at the non-refundable tax offset, the rate has increased to 40%.
4. R&D Expenditure is uncapped
Under the R&D Tax Concession, expenditure was capped at $2 million. Now with the R&D Tax Incentive, there is no cap on total R&D expenditure in order to access the cash benefit.
5. The definition of Research and Development has changed
Whereas the test of R&D Tax Concession was to do with 'Innovation and High Technical Risk', the new R&D Tax Incentive now looks at Research and Development from a scientific perspective. This will be daunting and potentially confusing to many long term users of the R&D Tax Concession as well as those that are new to the process.
Those that apply should be reminded that determining eligibility may be a challenge as the program is very detailed and complicated and contains numerous changes from the previous program.
It is also very important to be aware that under the new Tax Services Agent Act 2009, any consultants offering assistance with R&D applications must now be Registered Tax Agents (RTAs).
With the launch of this new program, companies should consider their eligibility early so that they don't miss out. There are numerous examples of companies who miss out because they didn't understand what they needed to do. Companies that may have missed out in the past should revisit their eligibility with the new rules.
At GrantReady we recommend that you review the new guidelines and get some expert advice before launching into an application.
If you have any questions regarding the R&D Tax Concession or R&D Tax Incentive legislation, please contact us on 03 9853 9853.