The incentive provides a 45 per cent refundable R&D tax offset available to companies with a group annual turnover of less than $20 million; and a 40 per cent non-refundable R&D tax offset available to companies with a group annual turnover of $20 million or greater (with any unused offset amounts capable of being carried forward).
These rates are prima facie more beneficial than those under the current R&D Tax Concession and are highly competitive with rates provided under similar programs in other jurisdictions. Other beneficial changes include:
- No limitation on the amount of R&D expenditure incurred by the entity in the income year to receive the refundable tax offset. Under the R&D Tax Concession, only companies with an aggregate R&D spend of less than $2 million could receive the R&D Tax Offset.
- An increase in exempt entity ownership rules to allow up to 50 per cent control by an exempt entity. Under the R&D Tax Concession an exempt entity could not have more than 25 per cent control.
- An increased ability to claim R&D done in Australia on behalf of an overseas-related entity.
- Foreign corporations that carry on R&D activities through a permanent establishment in Australia are now eligible to claim.
- An increased level of expenditure on overseas R&D activities may be eligible subject to the satisfaction of certain conditions. Under the R&D Tax Concession, this was limited to a cap of 10 per cent of the total project expenditure. However, companies will still be required to seek approval through an advanced finding that can be lodged at any time within the income year in which the overseas activities are undertaken.
A more strategic approach
The stated aim of the incentive is to encourage the competitive strength and development of Australian businesses. Key to achieving this objective is that companies become more strategic towards their R&D. It will also be necessary for the program’s administrators, AusIndustry, to understand the dynamic nature of business and the impracticalities of having a detailed, planned approach to R&D.
Although these drivers for success of the program were also issues under the former Tax Concession, some of the proposed changes to the program’s administration aspects indicate that businesses undertaking so called “genuine R&D” may have difficulty complying if they do not have the processes and systems in place to contemporaneously capture R&D, in the detailed format proposed.
Despite the program remaining a “self-assessment regime”, the level of detail required to register activities (a requirement for claiming the incentives) is far more onerous than under the Tax Concession. For example, companies will be required to separate out activities that “in the applicant’s opinion” are considered “core R&D activities” from those considered “supporting activities”.
Further, supporting activities undertaken in a production environment will only be able to be claimed where they are undertaken for the dominant purpose of supporting core R&D activities.
Dominant purpose
Part IVA is the only other section of Income Tax Law using a “dominant purpose” test. The Explanatory Memorandum (EM) for the Taxation Laws Amendment (Research & Development) Bill referred to precedent from Spotless Services Limited and Spotless Finance Pty Limited v Commissioner of Taxation [1993] FCA 276 (Spotless) in stating that the “dominant purpose” was the “prevailing or most influential purpose”. Whether Spotless should be used as precedent is debatable. Nonetheless, given the EM refers to precedent from that case, its findings will need to be considered when determining the dominant purpose of the supporting activities. Any contemporaneous objective evidence that a company can supply to support the proposed intent will be important.
In practice
The new R&D tax incentive should not prohibit any previous R&D claimants from accessing the benefits. However, it should be recognised that the processes that underpin the tax incentive are new. As the regime progresses into practice, AusIndustry and the ATO have stated they will provide additional guidance, particularly around key issues such as the “dominant purpose” test.
While uncertainties remain, it would be prudent for businesses to start planning now to make sure they can benefit from the generous benefits provided. ❍
Disclaimer
Any changes since the date of writing (25 August 2011) have not been considered.
