Australia has had tax concessions in relation to research and development for many years. The existing regime will be repealed from 30 June 2010 and replaced with a new scheme.
Under the existing concessions, Australian companies that incur research and development expenditure may be able to qualify for a deduction of up to 125% of the expenditure. The accelerated deduction rate of 125% only applies if the “aggregate research and development amount” is greater than $20,000. An additional 50% deduction is available to certain companies that have increased their R&D expenditure above their average R&D expenditure over the previous 3 years.
There is also a refundable tax offset concession for companies that do not wish to claim a tax deduction for expenditure (e.g. a company in tax losses). Among other things, to claim this offset, the “grouped R&D aggregate amount” for a year must not exceed $1 million and their turnover must be less than $5 million.
Note that the concession is only available to companies.
The changes:
From 1 July 2010 a research and development credit or offset will replace the existing system. If your company has a turnover of $20 million or less you will be able to obtain a 45% refundable tax credit. If your turnover is greater than $20 million, you can receive a 40% non-refundable tax credit.
A refundable tax credit means that your company can “cash-out” the concession when the company lodges its income tax return. A non-refundable tax credit means that the concession is not “cashed-out”. Instead, the credits are carried forward and recoverable against future taxable income.
The 45 per cent R&D Tax Credit is equivalent to a 150% tax concession. The new concession has the added advantage that companies can access the credit whether they are in tax profit or tax loss. Around 5,500 smaller companies will potentially be better off due to this, the government estimates. The government says that around 7,000 firm already gain access to the R&D concessions.
Here’s how the 150% effective tax break is worked out. Say your company spends $50,000 on research and development. 45% of this amount is $22,500. 150% of $50,000 is $75,000. Now, if you were to get a tax deduction at the rate of 30% (the company tax rate) on $75,000, this would give you a tax benefit (refund if you like) of $22,500 ($75,000 x 30%). So, giving your company a 45% tax offset on $50,000 is the same as giving your company a tax deduction for $75,000 at the rate of 30%.
And there is not going to be any limit on the amount of research and development expenditure that small companies need to spend in order to obtain the new tax concession. But, the definition of research and development that is used in the tax law will be “tightened” to ensure that only genuine R&D expenditure is claimed.
Also, to provide a “tangible demonstration of increased Government support for R&D by small companies”, the grouped R&D aggregate amount in relation to the R&D tax offset concession will be lifted to $2 million for the 2009/2010 income year.
These changes will mean that the R&D concession is no longer aligned to the corporate tax rate (currently 30%). Because tax deduction concessions are being totally replaced by tax credits set at a 45% or 40% rate, this does not involve the operation of the corporate tax rate.
I have not seen anything that suggests the concession will be extended beyond companies – which would be a help to many owner-operated businesses as most of these businesses are not operated through a company.
But one very good outcome of the new tax credit initiative means that franking credits for dividend payments will not be reduced. This solves the problem of the R&D concession, effectively, being a timing, rather than a permanent, concession.