New research and development tax incentive scheme

In the 2009-10 Federal budget, the Government announced the current R&D tax concession will be replaced with a new R&D tax incentive scheme from 1 July 2010.

While a consultation process is currently being worked through before the legislation is introduced into Parliament in early 2010, below are some of the key elements of the proposed R&D incentive scheme.

•  The key concessions under the new scheme will consist of either:
  • A 45% refundable R&D tax credit for companies with grouped turnover of less than $20 million per annum (equivalent to a 150% tax deduction), or
  • A non-refundable 40% standard R&D tax credit for companies with grouped turnover of more than $20 million per annum (equivalent to a 133% tax deduction).
• The $1 million expenditure limit that is currently in place for claiming the R&D tax offset will be removed, resulting in there being no cap on R&D spending that can be claimed as a 45% refundable tax credit under the new scheme.  As a transitional measure the R&D expenditure limit under the current R&D tax offset rules will be increased to $2 million for the 2009-10 financial year. 
• Grouping rules will continue to apply when calculating the thresholds for the new incentive i.e. the $20 million per annum turnover test.
• Eligible R&D activities will be defined as systematic, investigative and experimental activities that involve both innovation and high levels of technical risk, and are for the purpose of producing new knowledge or improvements.  Under the current rules, eligible R&D activities only need to involve innovation or high levels of technical risk.
• The current list of activities excluded from being considered R&D is expected to be retained, however the antiquated treatment of software under the current scheme is under review.
• The new tax credit will be available to companies that are up to 50 per cent owned by tax exempt entities (such as universities), doubling the current 25 per cent cap that exists under the current scheme.
• Both Australian owned and foreign owned companies incorporated in Australia will be eligible for the R&D tax incentive.  This enables access to the scheme where companies are undertaking R&D in Australia where the intellectual property is held overseas.
• However, the incentive can only be claimed by a company conducting R&D activities on its own behalf and where it has substantial interest in the R&D activities.  There are three criteria which will be retained from the current system to identify this, i.e. the claimant company must:
  • Bear the financial risk associated with the R&D project.
  • Have control over the R&D project, and
  • Effectively own the project results.
• Also under review is the treatment of core vs supporting R&D activities with potential for the two types of activities to be identified and limitations to be put in place for supporting activities.

MPR Group has significant experience in assisting companies claim under the current R&D tax concession rules.

We are particularly interested in assisting our clients through the transition to the new scheme, which could provide significant planning opportunities in relation to maximising the potential claims under the current tax offset and proposed refundable tax credit rules.

Please do not hesitate to contact Marc Peskett marcp@mprgroup.com.au or Brendan Brown brendanb@mprgroup.com.au or call our office on 03 9869 5900 for more information.