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2018 Budget and changes to the R&D Tax Incentive

CHANGES TO THE R&d TAX INCENTIVE

HERE IS A BRIEF LIST HIGHLIGHTING THE CHANGES TO THE R&d TAX INCENTIVE:

  • Changes will apply from 1 July 2018, pending passage through the senate

  • Lowering the rate of support for most startups to 41% (from 43.5%)

  • Introducing an intensity threshold for larger companies over $20M, rewarding R&D intensive activity with a higher benefit of up to 12.5% marginal

  • Greater scrutiny and monitoring activity

RSF Consulting's position:

In 2015, the Turnbull government announced the National Innovation and Science Agenda, or NISA. Our startup and tech community welcomed this renewed focus on Australia’s most dynamic sectors, and while the benefits of a few initiatives are yet to materialise, revisions to employee share schemes and government data access were long overdue. 

The 2018 budget departs from these priorities, and Australian startups in their growth stages will find little to celebrate. Small businesses not heavily involved in R&D may benefit from the renewal of the instant asset write-off, but startups will still be wiser to depreciate any assets used in R&D to make them eligible under the R&D Tax Incentive (R&DTI).

The R&DTI is critical to the success of many Australian startups, allowing them to access their tax losses via a refundable cash transfer, extending their runway and allowing them to conduct the experimentation required to succeed. The changes in the 2018 budget prioritise more established research and development companies, adjusting the tax credit downwardly for businesses with aggregated turnover less than $20M, and upwardly for businesses above that meet a certain threshold of claim intensity.

This intensity qualifier allows these larger businesses access to higher tax saving rates only if a sufficient proportion of their expenses are research and development. The effect will be to reduce transfers to large businesses doing incidental R&D, such as Telstra, and to prioritise support for large businesses for whom R&D is their primary concern. 

For small business (<20M aggregated turnover) the refundable offset rate will be reduced from 43.5% to 41%, and decrease commensurate to future company tax cuts. An annual cap of $4M on each cash refund will also be applied.

For large business (>20M aggregated turnover) the permanent tax benefit (difference between the tax rate and offset rate, which is not refundable for large companies) of 8.5% will be replaced by a marginal rate that starts at 4% and increases with R&D intensity up to 12.5%. Large businesses with an R&D intensity of greater than 13% will see a net benefit.

Consistent with the increase in regulator activity over the last few years, the budget reinforced a focus on program integrity. While increased scrutiny is appropriate, it is important for it to be cognisant of any additional overhead it may incur, and for it to be in touch with common R&D processes, particularly in the software sector. In this area, the regulator still lacks a breadth of knowledge over how software technology and development processes may differ from other engineering or scientific fields, making reviews an unnecessary burden.

In 2015, the Turnbull government recognised how critical innovators are to Australia’s economic future. While the R&DTI remains a key source of support for new ventures, the 2018 budget failed to live up to these ideals.

Tom Pisel