Lots of changes, minimal impact for SMEs and Startups

Forecast changes to the R&D Tax Incentive in last night’s budget will see a small impact with some SMEs and Startups benefit to drop from 43.5% to 41%, while large business benefits may reduce significantly depending on how much R&D expenditure they have.

Scott Morrison handed down his third Federal budget last night and finally put to bed weeks of speculation about the proposed overhaul of the R&D Tax Incentive program. Concerns that some companies would be excluded from the program have not been realised. The mixed bag of changes, which will take effect from 1 July 2018, aim to:
• improve the integrity of the program through increased enforcement, transparency and guidance;
• continue to provide support, albeit with reduced benefits in some cases, for smaller companies that undertake R&D activities; and
• refocus support for larger companies towards those undertaking higher intensity R&D.

SMEs and startups

For companies with an aggregated turnover below $20 million, the refundable R&D tax offset will now be a premium of 13.5% above the company’s corporate tax rate. The proposed rules will link the rate of the R&D offset to the claimant’s company tax rate, and in effect replace the current 43.5% incentive.

In practice this means that some companies may see a reduction in refundable benefit from 43.5% to 41% of eligible expenditure or a reduction in benefit from 16% to 13.5% depending on the company’s tax position.

Cash refunds from the refundable R&D tax offset will be capped at $4 million, noting that expenditure related to clinical trials is excluded from the cap. Any unrefunded amounts will be carried forward as a non-refundable tax offset. We don’t expect this change to have an impact on the vast majority of SMEs or startups.

Large businesses

Companies with an annual turnover of $20 million or more are currently entitled to a non-refundable tax offset of 38.5% of eligible R&D expenditure. The proposed measures involve the introduction of an R&D premium that ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of the company’s total expenditure for the year.

The marginal R&D premium will be the claimant’s company tax rate plus:
• 4 percentage points for R&D expenditure between 0 per cent and 2 per cent R&D intensity;
• 6.5 percentage points for R&D expenditure above 2 per cent to 5 per cent R&D intensity;
• 9 percentage points for R&D expenditure above 5 per cent to 10 per cent R&D intensity; and
• 12.5 percentage points for R&D expenditure above 10 per cent R&D.

This will have the greatest impact on companies with low levels of R&D intensity, reducing the potential benefit from 8.5% to as little as 4%. On the flip side, these will be welcome changes for companies with high levels of R&D intensity.

Lastly, the maximum amount of eligible R&D expenditure that can be claimed under the scheme is proposed to increase from $100 million to $150 million per annum.