In brief

The Australian Government has proposed welcome changes to the R&D tax incentive with effect from 1 July 2021, although without entirely retreating from its hotly debated proposed reforms (which the Senate Economics Legislation Committee is due to report on by 12 October).


Companies with aggregated annual turnover of A$20 million or more will continue to be rewarded based on their “R&D intensity” (broadly, R&D spend as a proportion of total spend), but with two rather than three tiers of R&D intensity:

Overall R&D tax intensityR&D tax offset rate
0% to 2%Company tax rate plus 8.5% (38.5% for companies with a 30% tax rate)
Above 2%Company tax rate plus 16.5% (46.5% for companies with a 30% tax rate)

 

Although not completely alleviating the bias inherent in the R&D intensity threshold against industries with high operating costs, the good news is that this represents a significant increase in the R&D tax offset rate for big businesses conducting significant R&D activities, and for those falling below the 2% threshold, the measure retains the current R&D tax offset flat rate of 38.5% (in comparison, the proposed reforms effectively cut the R&D tax offset rate to 34.5% for expenditure below an intensity threshold of 4%).

For taxpayers eligible for the refundable tax offset (aggregated turnover less than A$20 million), the tax offset rate will be set at the taxpayer’s tax rate plus 18.5% – an increase from the proposed reforms, which would have cut the refundable offset rate to the tax rate plus 13.5%.  As the company tax rate decreases to 25% from 1 July 2021 for businesses with aggregated turnover of $50 million or less, this effectively represents no change to the current R&D tax offset flat rate of 43.5%. The previously-proposed A$4 million cap on annual R&D cash refunds will also not proceed (as originally proposed there was a carve out from this cap for clinical trials).

This new proposal will need to be passed through Australian Parliament to become effective.

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