Federal Budget 2020 – Research & Development

Talking Points Reversal on previously planned changes to cut the R&DTI by approx $1.8bn. Reforms applicable from 1 July 2021. 18.5% above the company tax rate for small to medium-sized enterprises. Move to a two-tiered offset system for large companies based on being either under or over a 2% “R&D intensity” rate with a significantly increased benefit for those over this level. Eligible expenditure threshold increased to $150 million.

In last week’s Federal Budget, the Government announced it intends to encourage innovation and has included a number of packages aimed at enhancing the current Research and Development Tax Incentive (R&DTI).

Given the overwhelming dissatisfaction from the business community towards the originally proposed reform to the R&DTI, it is fair to say that these changes were met with positivity.

For the last 5 years, the country’s most innovative companies have experienced a continual decline in Federal funding of R&D incentives and a tightening of eligibility criteria. This has seen the Federal Government’s investment in research and development fall 30% from $17.32b in 2016 to $11.92b in 2019.

At CharterNet, we strongly believe that Australia’s economic prosperity going forward depends on our collective ability to export world-class innovation, not just world-class materials.

What do the R&DTI changes mean for your business?

For small / medium companies:

• Consistent with the existing framework, these are companies with aggre-gate annual turnover of $20 million or less;
• To the satisfaction of many in the start-up and SME sectors, there will no longer be a $4 million cap on annual R&D refunds as previously proposed. Instead, the refundable tax offset will be a flat 18.5% above the relevant company’s tax rate;
• As an example, if a company’s tax rate is 25%, the tax offset rate will be 43.5%;
• The changes take effect from 1 July 2021.

For large companies:

• For companies with annual aggregate turnover of $20 million or more, in-stead of the previously proposed three-tiered offset, there will now be a two-tiered offset;
• The Government’s need to stimulate business spending combined with the considerable industry feedback on the structure of the R&DTI has resulted in this simplified structure – a system designed to reward businesses that spend a greater percentage of their annual expenditure on R&D.
• Businesses that spend between 0% and 2% of expenditure on eligible R&D activities will be eligible to claim a non-negotiable tax offset of 8.5% over their company tax rate. Businesses that spend more than 2% on eligible R&D activities will be eligible to claim a 16.5% non-refundable tax offset over their company tax rate;
• As previously announced, the eligible R&D expenditure threshold will in-crease to $150 million from the current $100 million level;
• The changes take effect from 1 July 2021.

In summary, this positive backflip from the Federal Government in its commitment to the R&D Tax Incentive incentivises Australian businesses, large or small, to continue their pursuit of creating innovative, world-class products and services.

If you want to understand what this could mean for your business, feel free to get in touch.