R&D rate reduction passes into law

R&D rate reduction

Georgia King-Siem explains the implications of the Government's reduction of the R&D Tax Incentive tax offset rate.

Director, Tax

KPMG Australia

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Late Thursday 15 September, the Senate passed the Budget Savings (Omnibus) Bill 2016. Schedule 22 of the Bill amends the Income Tax Assessment Act 1997 to reduce the rates of the tax offset available under the R&D Tax Incentive for the first $100 million of eligible expenditure.

For income years beginning on or after 1 July 2016:

the non-refundable tax offset will reduce from 40 to 38.5 percent

the refundable tax offset will reduce from 45 to 43.5 percent.

For larger businesses

For those accessing the non-refundable tax offset (i.e. those with aggregated turnover of $20 million of more), the Bill will reduce the permanent tax benefit by 15 percent; from 10 to 8.5 cents in the dollar.

For medium sized businesses

For those accessing the refundable tax offset that do not qualify as small business (i.e. those with aggregated turnover of less than $20 million but which do not qualify as a small business), the total refundable amount will reduce (to 43.5 cents in the dollar) and the permanent tax benefit will reduce by 10 percent; from 15 to 13.5 cents in the dollar.

For small businesses

For those accessing the refundable tax offset that also qualify as a small business, the total refundable amount will reduce (to 43.5 cents in the dollar), but the permanent tax benefit will stay the same; 15 cents in the dollar.

Unintended consequences

The rate reduction does not account for clawback or feedstock adjustments. As a result, those accessing:

  • the 43.5 percent refundable tax offset will have their permanent tax benefit reduced to either 3.5 or 5 percent on impacted expenditure; and
  • the 40 percent non-refundable tax offset may have a financial penalty of 1.5 percent for impacted expenditure.

We suggest companies consider the merits of claiming expenditure likely to be subject to adjustments for feedstock or clawback before registering your R&D activities for income years beginning on or after 1 July 2016.

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