Research and Development Tax Incentive bills receive Royal Assent

On 8 September 2011, two research and development (R&D) tax incentive bills received Royal Assent and are now in force in Australia. This will give effect to the new R&D Tax Credit program, which replaces the existing R&D Tax Concession program. The new Tax Credit program retrospectively applies to R&D activity from 1 July 2011.

What is the R&D Tax Credit Program?

The R&D Tax Incentive provides a targeted tax offset designed to encourage more companies to engage in research and development in Australia.

The R&D Tax Incentive has two core components:

  • a 45 per cent refundable tax offset (equivalent to a 150 per cent deduction) to eligible entities with an aggregated turnover of less than $20 million per annum; and
  • a non-refundable 40 per cent tax offset (equivalent to 133 per cent deduction) to all other eligible entities.

How will this work?

Assume a company has an annual aggregate turnover of $5 million and spends $1 million on eligible R&D activity. The tax offset available is 45 per cent or $450,000. At a company tax rate of 30 per cent, $1,500,000 of tax is payable on the $5 million turnover. This tax which is otherwise payable is offset by the R&D activity which means only $1,150,000 of tax is payable.

Eligible R&D activity

The Government is reviewing the eligibility criteria to ensure that only valid R&D activity qualifies under the new Tax Credit program. Under the new system, eligible R&D activities are categorised as either ‘core’ or ‘supporting’ R&D activities.

Core R&D activities are experimental activities whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work:

  • that is based on principles of established science; and proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and
  • that is conducted for the purpose of acquiring new knowledge.

Commercial, legal and administrative aspects of patenting, licensing or other activities are not core R&D activities. However, these activities will be eligible if shown to be ‘supporting’ R&D activities. Supporting R&D activities are activities directly related to core R&D activities that are undertaken for the dominant purpose of supporting core R&D activities.

Contact: If you have any specific enquiries about the R&D Tax Incentive, please contact Paul Jones.