Last night the ScoMo announced changes to the R&D Tax Incentive scheme, impacting the budget by delivering a $2.4B saving to the budget bottom line over 4 years. In 2016-17, the annual cost of the scheme reached nearly $3B. The changes are therefore projected to deliver a $600M reduction annually. Significant uncertainty persists however around whether these changes are aligned with the intent of the scheme– ‘a more targeted incentive for companies to invest in R&D’. Key changes include:
R&D Tax Incentive now coupled with the company tax rate
- R&D Tax Incentive Benefit = Tax Rate + Tax benefit %
- Currently the Tax incentive % is fixed (38.5% or 43.5%) relative to the company tax rate which is set to decrease annually
- For SME’s and start-ups, they will see a small reduction in their benefit as the R&D Tax incentive is set at 13.5% above the company tax rate
- Some companies (turnover <$20M) will see their cash benefit take a 2.5% haircut from 43.5% down to 41% depending on the tax rate
Annual refund capped at $4M for companies with an annual turnover of <$20M
- This means that companies who have projects that exceed $9,756,098 in eligible expenditure will receive no additional cash incentive.
- Unrefunded amounts will be carried forward as a non-refundable tax offset.
- Clinical trials are excluded from this cap.
- Currently The benefit companies receive annually is not capped.
- Typically, companies with under $20M of turnover have less than 50% of that turnover spent on eligible R&D (according to a 2017 report from the Chief economist, only 10% of SME’s exceed 50%. The median R&D-active firm spent about 8 per cent of its turnover on R&D expenditure)
- Given the lack of meaningful innovation policy over the years the number of companies affected by this is minimal.
- Clinical trials have been excluded but this will impact the rates of investment for companies looking to grow rapidly in high technology areas
R&D Intensity test applied in thresholds to companies with an annual turnover of >$20M
(ScoMo R&D Intensity= Annual R&D Expense/ Total Annual Expense)
- R&D Tax Incentive Benefit = Tax Rate + Tax benefit % associated with your ScoMo R&D Intensity
- Currently there is only a requirement that the applicant incur more than $20K worth of eligible expenditure to access the benefit.
- Currently for companies with an annual turnover of >$20M they can access a non-refundable tax offset of 38.5% of eligible R&D expenditure.
- This change effectively reduces the potential tax benefit from 8.5% to as low as 4% (assuming the 2% intensity threshold is met)
- Major impact to capital intensive low margin manufacturing
- The commercial decision to offshore or outsource low margin manufacturing is more attractive under this incentive structure because it reduces the entity cost base and lifts the entity R&D intensity ratio. Ironically, this is misaligned with the current jobs and growth tagline.
- Positive impact on inherently R&D intensive industries (Biotech, Medtech etc) with large turnovers
- Significant planning is now required to access the program in light of current documentation requirements coupled with an intensity test and more aggressive compliance auditing
- More aggressive auditing is squeezing software claims and is likely to upset intensity rations if large slabs of claimed expenditures are judged ineligible by the ATO. The new tests give the ATO another tool to arbitrate R&D claims and curtail program costs