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Update on the proposed R&D Tax changes – Submissions due 6 March 2020 05 Mar 2020

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In case you missed the news in December, proposed changes to the R&D Tax Incentive program were re-introduced to Parliament and will be subject to a second Senate committee review.

The Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 was tabled into the Federal Parliament just prior to the end of 2019. However, given the concerns with the proposed changes, it has been referred to a Senate review committee as per the first failed attempt to revise the R&D tax program.

To aid its review, the Senate committee has called for submissions on the proposed changes to be provide by 6 March with the committee to release its findings by 30 April 2020.

The Bill seeks to introduce changes to the R&D tax program that closely resemble changes to the program first announced in the 2018 Budget and which had previously been debated within Parliament and referred for review by a Senate committee.

The Senate committee rejected the Government’s first attempt to revamp the R&D tax program due to concerns relating to the uncertainty of the proposed changes and the retrospective nature of the changes. Despite some tweaking of the calculation of the R&D tax offset for large claimants, the new Bill has retained many of the changes to the R&D Tax Incentive that were previously rejected by the Senate committee and broadly criticised by Australian businesses.

Industry Minister Karen Andrews recently defended the changes stating, “the government wants to encourage businesses to back themselves – to promote even more investment in R&D. We have listened to businesses and are introducing reforms to simplify, target and improve the system”.

Unfortunately, the new Bill provides little encouragement for Australian businesses to increase investment in R&D and, in their current form, promote uncertainty and complexity for claimants in comparison with the current program. To illustrate:

  • The changes proposed, if enacted, will apply retrospectively to income years commencing 1 July 2019, ignoring recommendations from the Senate committee and impacting business that have already planned and committed investment to R&D projects and initiatives.
  • A new and complex formula for calculating R&D tax benefits based in an R&D expenditure intensity has been retained for large claimants and, despite being reduced from a four-tier to three-tier calculation, remains complex and entirely unpredictable. The effect is to tie R&D tax benefits to total business expenditure which can fluctuate on the basis of factors beyond a company’s control and is not able to be determined until after the income year is complete.
  • Claimants with a turnover greater than $20mill will need to achieve an R&D expenditure intensity of 14.1% to achieve an equivalent tax benefit to the current program (8.5 cents per $1 R&D expenditure) – by comparison, the initial changes proposed and rejected by the Senate committee required an intensity of 13.1% for claimants to match the current R&D tax benefit rate.

The impact of the proposed changes will undoubtedly discourage rather than encourage investment in R&D, particularly for manufacturers and other large businesses with annual revenue of more than $20mill.

If you are interested in making a submission on the changes to the R&D tax program, please note the deadline is this week, Friday 6 March.

Please contact the R&D tax experts at Glasshouse Advisory for more information on the R&D tax program and advice on how the proposed changes might impact your ability to access tax benefits through this program.

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