Since 2015, Australian research and development (R&D) and innovation communities have done their fair share of hand wringing over planned changes to the R&D tax incentive (RDTI). But this month’s Federal Budget saw the government finally come off the fence on the future of this crucial tax refund. And the new measures—rubber-stamped by the long-awaited Senate Committee report— in many ways represent a reversal of fortune for businesses with R&D.
How did we get here?
The RDTI has been around since 2011. It launched with one broad objective in its sights: to encourage R&D that otherwise might not happen, and that would also likely offer up broader economic benefits for Australia. Four years later, the Turnbull Government commissioned a review and found the incentive wasn’t hitting the mark on its original objectives. To remedy these shortcomings, the review panel put forward a series of recommendations, which were included as part of a wider draft legislative bill. The three key goals of the proposed changes were to: better target the R&D tax incentive, enhance its integrity and improve its administration. In 2018, the Senate referred the bill to the Senate Economics Legislation Committee to consult, review and report on. Debate raged over potential amendments. The spectre of potential retrospectivity cast a shadow over 2019-20 claims for some businesses. Almost two years later, after countless delays and a pandemic, the future of the R&D tax incentive has finally been settled—for now.
Before we turn to what’s new and where we’re heading, it’s worth pausing to look at the current R&D tax incentive.
- If your business has an annual aggregated turnover of less than $20 million and an annual R&D spend of more than $20,000 you’re eligible for a 43.5% refundable tax offset on every dollar you spend on R&D.
- Larger businesses with turnovers of more than $20 million, or organisations controlled by one or more entities classified as exempt can access a 38.5% tax offset that’s non-refundable.
- The current R&D tax incentive has an expenditure threshold of $100 million.
The new financial year, starting 1 July 2021 will usher in a raft of changes. Before October’s Federal Budget, Australian innovation was staring down the barrel of a $1.8 billion cut to the R&D tax incentive. Now, the incentive will be increased by $2 billion. Here’s how it’s set to play out:
- If your company has an annual turnover of less than $20 million the refund rate on your R&D expenditure will be equivalent to the company tax rate you’re paying, plus an 18.5 percentage point premium.
- There will be no cap on your annual refund.
- The ceiling on the R&D expenditure amount has been raised from $100 million to $150 million.
- If your business is larger, with a turnover of $20 million or more, a new two-tiered R&D intensity system will apply. The R&D intensity is calculated in terms of your company’s R&D expenses as a percentage of your company’s total expenses.
- For businesses with an R&D intensity of 0-2%, the intensity premium is 8.5 percentage points above your company tax rate. For businesses with an R&D intensity rate of 2% or more, the premium is 16.5 percentage points above the company tax rate you’re paying.
How will it impact businesses with R&D?
Most business doing Australian R&D are breathing a huge sigh of relief following the Federal Budget announcement and Senate Committee report. In broad strokes, here’s what the budget changes will mean for businesses, big and small.
Under $20 million in annual turnover
Under the proposed changes that were nixed in the October budget, the refundable tax offset had been heading for a haircut at 13.5% above the company tax rate. Most innovation businesses with a sub-$20 million turnover, paying a company tax rate of 27.5%, would have seen their refund drop from 43.5 cents in the dollar to 41 cents for FY 2019-20 and 39.5 cents in 2020-21. While the 1 July 2021 R&D refundable tax offset will increase to 18.5 percentage points above the company tax rate these businesses pay, the company tax rate is reducing to 25% on 1 July 2021 for businesses with turnovers under $50 million. The net effect is the refundable tax offset rate will remain the same as it is now, at 43.5 cents in the dollar. Before the Federal Budget, a $4 million cap on the refundable offset was on the table. Now, there is no cap, which is a shot in the arm for smaller businesses with R&D.
Over $20 million in annual turnover
The two-tier R&D intensity option is a welcome simplification. Before the budget, a three-tier system was being mooted. The increase in the maximum R&D expenditure threshold from $100 million to $150 million is also welcome, although some innovation stakeholders were hoping for $200 million. The 16.5 percentage point rate for businesses with over 2 % R&D intensity certainly sends a strong signal on innovation to the big end of town. But critics argue that it, along with the $150 million R&D expenditure cap don’t go far enough to help manufacturers with Australian R&D. This group typically spends four times the national average in R&D but has high wage and raw material costs that disadvantage them when it comes to the R&D intensity test.
What does it mean for R&D financing?
The key takeaways for R&D financing are certainty and clarity. The existing provisions for the R&D tax incentive apply for FY 2019-20 and FY 2020-21. That means any concerns about retrospective changes to refunds and potential impacts on R&D financing for those financial periods are gone. Businesses eligible for the R&D refund can now lock in their plans to apply for Radium Advances with confidence.
Supporting you and your R&D
Certainty around the RDTI is as welcome as it is overdue. But it’s only one element when it comes to funding R&D and innovation. It’s vital that businesses with R&D keep an eagle eye on their capital and cash flow. Maintaining steady cash flow and capital is more important than ever in the pandemic economy. Locking in a Radium Advance every quarter not only increases your cash flow, it boosts your overall refund too. If you’re ready for more certainty, reach out to us on 1800 723 486 or request a call today.
 The Senate Economics Legislation Committee, Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 [Provisions], October 2020