Parliament has passed the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010.  The new R&D Tax Credit Program will replace the R&D Tax Concession effective from 1 July 2011. The new R&D regime provides a more generous incentive but is limited by tighter definitions of R&D.

Moore Stephens will be running information sessions on the new R&D incentive in Sydney on 26 October 2011 and in Melbourne on 10 October 2011.

Impact to SME Sector

Given SMEs and start-ups are generally the ‘hotbed’ of new ideas and creativity, the R&D Tax Credit Program will foster an innovative culture and as a nation we will benefit from their R&D activities.

In summary, the changes are:

Companies with a group turnover less than $20 million

The base rate has been increased with no limit or threshold on R&D expenditure. Companies will be eligible for a 45% refundable credit (a cash rebate that is paid even if the company is in a tax loss and cannot benefit from tax deductions).  There is no limit on the amount of expenditure that can be claimed.

Currently companies with tax losses can only obtain a cash refund if they have a group turnover of $5 million or less and aggregate R&D expenditure of $2 million or less.  If they exceed either of these limits they can only benefit by additional income tax deductions which only provide a cash benefit if the company has taxable income.

For example, a group with a turnover of less than $20 million with $1 million of R&D will receive a cash rebate of $450,000 whereas under the current rules the rebate would usually be $375,000.

The Government will introduce quarterly payments for small and medium businesses from 1 January 2014. These firms will get their credit sooner, significantly improving their cash flow and incentive to invest in R&D.

Companies with a group turnover greater than $20 million

The base rate has been increased. Companies will be eligible for a 40% non-refundable credit against their tax liability. This is equivalent to a 133% tax concession (currently the concession is usually 125%).

The existing R&D Tax Concession and Tax Offset (i.e. Cash Rebate) is still available for the 2010/11 year.

Way Forward

The cost of the new R&D Tax Credit Program is intended to be funded by a tighter definition of eligible R&D activities which will restrict its availability in some sectors.   For instance, the definition of 'core' and 'supporting' R&D activities will be narrowed, with a greater emphasis on experimentation and the introduction of a dominant purpose test for certain supporting activities.  A new feedstock regime operates to reduce claims that generate revenue (eg the manufacture of goods).

Accordingly, we advise all current R&D claimants to review their systems and processes to ensure they can identify, track and substantiate all eligible R&D activities and costings under the new R&D Tax Credit Program to ensure compliance with the new program and to maximise and retain any R&D potential.

For current non-claimants of the R&D Tax Concession, we would be pleased to assist with establishing there are any opportunities under the future R&D Tax Credit Program.

There are many other amendments which could affect your business.  If you have any questions regarding the R&D incentive please contact your Moore Stephens Tax Partner.

Author:  Howard Badger, Moore Stephens Sydney

Contact

Howard Badger
T  +61 02 8236 7700
hbadger@moorestephens.com.au

www.moorestephens.com.au