Impact of Company Tax Cuts on R&D Tax Incentive

Impact of Company Tax Cuts on R&D Tax Incentive

Georgia King-Siem discusses increased benefits to the R&D Tax Incentive from the passing of the Enterprise Tax Plan Bill 2016.

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The scaled back Treasury Law Amendment (Enterprise Tax Plan) Bill 2016 (ETP Bill) is set to pass into law after it passes back through the House of Representatives.

The ETP Bill will phase in reductions to the company tax rate and expand small business tax benefits. Both outcomes will increase benefits under the Research & Development (R&D) Tax Incentive (the Incentive).

The Incentive offers two levels of benefit determined by a company’s aggregated turnover (AT); those with an AT less than $20M can access a refundable 43.5 percent tax offset and those above, a non-refundable 38.5 percent tax offset. As the R&D tax offset is applied against a company’s income tax liability, the permanent tax benefit (PTB) is calculated as the tax offset rate less the relevant corporate tax rate.

Table 1 below shows the PTB breakdown by company AT for FY2017 prior to the ETP Bill, but after the R&D tax offset rate was lowered by 1.5 percentage points last year (from 45 to 43.5 percent and 40 to 38.5 percent respectively).

Table 1

Aggregated
Turnover (AT)
FY2017 (before ETP Bill)
R&D tax offset
rate
Corporate tax
rate
Permanent tax
benefit (PTB)
<$2M 43.5% 28.5% 15.0%
<$20M 43.5% 30.0% 13.5%
$20M+ 38.5% 30.0% 8.5%

If the R&D tax offset remains the same for FY17 onwards, then Table 2 shows the flow through impact of the ETP Bill changes on the PTB receivable under the Incentive over the next 3 years.

Table 2

Aggregated
Turnover (AT)
FY17 FY18 FY19
R&D Tax PTB R&D Tax PTB R&D Tax PTB
<$2M 43.5 27.5 16.0 43.5 27.5 16.0 43.5 27.5 16.0
$2M to <$10M 43.5 27.5 16.0 43.5 27.5 16.0 43.5 27.5 16.0
$10M to <$20M 43.5 30.0 13.5 43.5 27.5 16.0 43.5 27.5 16.0
$20M to <$25M 38.5 30.0 8.5 38.5 27.5 11.0 38.5 27.5 11.0
$25M to <$50M 38.5 30.0 8.5 38.5 30.0 8.5 38.5 27.5 11.0
$50M+ 38.5 30.0 8.5 38.5 30.0 8.5 38.5 30.0 8.5

As Table 2 above shows, the PTB under the Incentive will:

  • Increase slightly from 15 to 16 percent for existing Small Business Enterprise (SBEs) (AT <$2M)
  • Increase for companies as they qualify as SBEs
  • Remain static at 8.5 percent for larger companies (AT $50M+)

However, note the Government is still reviewing the Incentive and that there are a number of recommendations before it which would impact the R&D benefit receivable if implemented. Further the upcoming Federal Budget may also contain measures which will impact the Incentive.

KPMG’s Federal Budget Brief is prepared immediately following the release of the Federal Budget and will include an assessment of any impact the Budget may have on Government support for innovation including programs such as the Incentive.

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