New R&D Tax Credit introduced

The Government has introduced the R&D Tax Credit to replace the existing R&D Tax Concession with a more certain, more generous research and development incentive for business, particularly SMEs.

The rule confirms the start date of 1 July 2010, which provides increased benefits to smaller firms as quickly as possible, and clarifies that ‘factory floor R&D’ will be included under the R&D Tax Credit.

Experimental development is considered important to Australian firms and represents 60 per cent of R&D expenditure in Australia according to current research. That is why changes have been made to the legislation and explanatory materials to further emphasise support for experimental development.

In addition to amendments to the Law, the Government has agreed to focus specifically on the dominant purpose test when the R&D Tax Credit is reviewed in three years time. 

Although there will be an increase in the tax benefits and offset available for R&D registered entities, under the new rule, there will more stringent eligibility requirements requiring greater substantiation and more detailed R&D plans.

Some of the key proposed changes under the new R&D Tax Credit Program which replaces the R&D Tax Concession Scheme and is due for commencement on 1 July 2010 are as follows:

Eligible entities are:

• A corporation that is an Australian resident
• A foreign corporation that is resident of a country with which Australia has a double tax agreement and carries on a permanent business in Australia
• A public trading trust with a corporate trustee.

It does not consider whether IP is owned in Australia or overseas. It only considers where and on whose behalf the R&D is conducted, and where the company is incorporated.

Increased Tax Benefits

Two core components are:

1. A non-refundable 40% R&D tax offset
2. A 45% refundable R&D tax offset for entities with a turnover of less than $20M.

The refundable Offset limited to group turnover of $20M and no R&D expenditure limit.

Activities Covered

• Core R&D activities must involve considerable novelty and high levels of technical risk
• Certain listed activities are specifically excluded from being R&D activities (either core or supporting)
• Software services other than software development are explicitly excluded from being R&D activities
• Integrating off-the-shelf computer software is explicitly excluded from being an R&D activity.

Pre-approval for overseas R&D activities can be sought where:

(a) There are physical limitations on an R&D activity being conducted in Australia

(b) The activity to be conducted overseas makes a significant scientific contribution to related Australian R&D activities

(c) The related R&D activities to be conducted in Australia will be significant relative to the activity to be conducted overseas.

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