Exposure Draft (“ED”) legislation was released by Treasury on proposed amendments to the research and development (“R&D”) provisions (click here). One of the main changes contained in the ED is the proposed introduction of an R&D intensity threshold for R&D companies with aggregated turnover of $20 million or more. Pitcher Partners has expressed its significant concern with this measure in its submission to Treasury (click here).
What is the R&D intensity?
The R&D intensity is to be used to determine the tax offset premium that an entity will be able to claim over and above the corporate tax rate applicable to the entity. The intensity threshold would range between 4% and 12.5%, based on the entity’s expenditure on R&D activities as a percentage of total expenditure. For example, if 3% of an entity’s total expenditure is on R&D activities, its premium would be equal to 6.5%. The tax offset would therefore be 36.5% for a company subject to a 30% tax rate.
What are the problems with the intensity threshold rules?
The ED is riddled with significant complexity in calculating the proposed R&D intensity. In determining expenditure, the ED requires both capex and operating expenditure to be included. The first step requires the amount of expenditure for a year to be determined having regard to the full application of accounting standards. The result of that step is then adjusted so that only amounts that have been incurred for tax purposes are counted. Further, the explanatory documents accompanying the ED suggest that regard may be had to the expenditure of a group to determine the R&D intensity threshold for the relevant R&D entity. This would mean that adjustments would be required for inter-entity transactions, as well as adjustments to the intensity threshold as and when tax returns are lodged for entities in the group and the amount of group expenditure that was incurred determined.
We believe that the proposals would make it near impossible to calculate the R&D intensity threshold with any degree of certainty and we have strongly recommended that the Government reconsider this measure.
How does the proposed regime compare to OECD countries?
We are concerned that the proposed intensity rules are not in line with what our OECD trading partners are offering around R&D incentives.
For example, New Zealand has recently announced changes to its Tax Incentive regime. The proposed regime provides for a 12.5% non-refundable tax credit on eligible expenditure incurred from 1 April 2019; allows the tax credit to be available to any type of entity conducting R&D activities (not just companies); sets the rate based on the median tax credit available in OECD Countries; applies the Tax Incentive to all eligible R&D expenditure rather than it being restricted to incremental spending; provides an imputation credit, equal to the tax credit, which can be allocated to investors when dividends are distributed. In particular, New Zealand rejected an “intensity” rule due to the “inherent complexity” of such a rule.
In comparison, the Australian regime will likely result in most companies only accessing the lower (4%) premium; can only be accessed by companies; cannot be passed through to shareholders and will introduce significant compliance burdens. We are concerned that the result will be a significant reduction in R&D activity in Australia.
What have we submitted?
We have requested the Government to rethink its policy on the R&D intensity. Should they proceed with the proposal, we have made recommendations to significantly reduce the complexity, including: basing the calculation on amounts in the tax return (e.g. deductions and notional deductions disclosed for the relevant income year); and the removal of the proposed grouping rule. We understand that the Government is keen to introduce new legislation as they will apply from 1 July 2018. We will provide an update on the new measures once they are updated and released.