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How the proposed R&D changes impact Australia's top innovators Tuesday 21 Aug 2018

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In May this year Treasurer, Scott Morrison announced his intention to overhaul the current R&D Tax Incentive program, citing a need to restore ‘integrity’ to the program and to reward those companies that invest heavily in R&D, rather than supporting companies engaged in activities he referred to as ‘business as usual’ activities.

In revamping the program, scant details were initially released, but on the 29th of June, the proposed draft legislation was released, and it doesn’t look good for companies with an aggregate turnover of more than $20 million.

The proposed R&D Tax Program will be divided into companies with an aggregate turnover of less and $20million and those with an aggregate turnover of more than $20million. For larger companies with an aggregate turnover of more than $20million, the Treasurer has proposed the introduction of an ‘R&D intensity test’, where companies can achieve a higher rate of R&D benefit the more they spend on R&D activities. According to budget papers, the proposed R&D intensity test will be calculated by looking at the ‘proportion of R&D expenditure over total expenditure’, however to date, what constitutes ‘total expenditure’. However, when the draft legislation came out on the 29th June 2018, the definition as to what constitutes an R&D entity’s total expenditure exposed itself as a very complex and unpredictable calculation. Section 355-115 of the proposed amendments to the Income Tax Assessment Act 1997 (ITAA97) notes:

  1. An R&D entity’s expenditure for an income year is the sum of the amounts covered in subsection (2).
  2. The following amounts are covered by this subsection:

a. the expenditure incurred by the R&D entity for the income year worked out in accordance with the accounting principles (a defined term).

b. any amount the R&D entity can deduct for the income year as mentioned in subsection 355-100 (1) to the extent it is not covered by paragraph (a).

This definition creates significant uncertainty; and inequity, as it is tied to the expenditure of an R&D entity. An R&D entity is (amongst other things), a corporate entity registered in Australia. Therefore, if the R&D entity is the head of an Australian multinational group conducting R&D in Australia, it must include all expenditure for the R&D entity (including that of entities in overseas jurisdictions).

Read the full article here. Contact our R&D tax experts to learn more about the impacts the proposed changes will have on business and innovation in Australia.

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