R&D Tax Incentive lodgements are approaching – lodge by 30 April 2019
Treasurer Josh Frydenberg handed down his first Australian Federal Budget last night for FY2020. There is not a lot of detail on any planned changes the R&D Tax Incentive in this budget, especially in comparison to the major developments announced in last year’s budget. However within the detailed budget papers the Government has flagged further savings of $1.35 billion. It is not clear whether these further savings flagged will come from increasing compliance with existing legislation, or whether the intent is to announce more changes in addition to those announced in the 2018 Budget which have not yet been enacted into law. In either case, uncertainty remains.
Some of the further highlights of the 2019 Budget as they relate to Intellectual Property and Innovation include:
The 2019 Budget has confirmed the Export Market Development Grant (EMDG) program will receive a boost of $61 million over the next three years. This much needed cash injection is a promising start by the Federal Government to support the 3,500+ Aussie exporters that are currently accessing the EMDG program. The funding pool has remained frozen since FY2014 despite a 70% increase in applicants. This will see $180 million added to the program by FY2022, honouring the Coalition’s commitment to restore the $100 million that was cut from the program back in FY2013. Our EMDG experts provide further details on the implications of the Budget changes to the EMDG program which were flagged at the end of March here.
In the 2019 Budget, the Government has stated that the estimated expenditure for the R&D program for FY19 is $1.97 billion. However, in the 2018 Budget, estimated expenditure for FY19 was $2.37 billion.
Although there is no clear indication as to the reason for this decrease in expenditure, one potential factor could be the implementation of proposed changes to the R&D Tax Incentive announced in the 2018 budget (see our insights on last year's Federal Budget here). However, the changes announced last year are unlikely to be implemented in their current state following the Senate’s Economics Legislation Committee’s report into the proposed changes tabled in February 2019, which recommended to ‘defer consideration’ of the Bill. This position appears to have been confirmed by Treasurer Josh Frydenberg, who previously told InnovationAus.com that ‘[we] agree with the committee’s recommendation that Treasury consider technical refinement to implementation.’
With the proposed changes unlikely to be enacted in their current form, another potential reason for a reduction in program expenditure could be the Government’s reliance on a downward trend in relation to total claimants and total claim expenditure, particularly in the ICT industry, which has been an area of increased review and audit activity over the past 12-18 months. Watch this space for developments and we will keep you updates as any changes to be announced.
Further to the recent emphasis on compliance, the 2019 Budget will increase support for both regulating Government bodies overseeing the R&D Tax Incentive program. Firstly, the ATO will increase staffing levels by almost 700 in FY2020, and receive increased funding of $71 million. The stated aim is to target these resources toward cracking down on multinational tax avoidance. These resources will presumably be also utilised to further support enforcement of compliance upon R&D tax claimants, both large and small.
Similarly, the Department of Industry, Innovation and Science, which also regulates the R&D Tax Incentive, will receive a boost of more than 150 staff into the next financial year. This increase in staffing, in addition to the stated efficiencies to be generated through automation initiatives, are expected to free up more resources to increase compliance enforcement efforts.
The additional support for the key regulators should raise expectations that recent audit activity will be extended as the Government seeks to ensure the integrity of its flagship innovation program.
Lowering the small and medium sized business tax rate
The Government has announced in last night’s budget lower tax rates for companies with turnover below $50 million, proposing a 25% tax rate to be applicable from FY2022 – five years earlier than previously planned. This represents a 2.5% reduction from the current 27.5% tax rate.
The changes proposed to the R&D Tax Incentive last year have not become law. If the changes announced last year do not come to fruition, the reduction of the tax rate announced last night will increase the net tax benefit all R&D tax claimants with turnover of less than $50 million from FY2022, as illustrated below.
The net tax benefit received by a company from accessing the R&D Tax Incentive is calculated by reference to the difference between the incentive rate and the applicable corporate tax rate. The currently applicable R&D rates are the 43.5% refundable offset for companies with turnover less than $20 million, and the 38.5% non-refundable offset for entities with turnover greater than $20 million.
Instant asset write-offs
In addition to the changes announced to the small business income tax rate, the Government intends to increase the instant asset write-off cap from $25,000 to $30,000 and make it available to businesses with an aggregated annual turnover of less than $50 million. Under the measure, small and medium businesses will be able to immediately deduct eligible assets costing less than $30,000 that are first used, or installed ready for use, from Budget night to 30 June 2020. This could impact R&D claims for FY2019 and FY2020 in that they will likely increase the losses for pre-revenue entities, thereby increasing the access to cash refunds under the R&D Incentive.
It is however worth noting that instant write-off cap is currently $1,000 with the Bill introduced into Parliament to enact the increases not yet passed.