Glasshouse Advisory Federal Budget Review
Published on 10 May, 2017
Our colleagues at Glasshouse Advisory have examined last night’s budget and explored its impact on the R & D Tax scheme, IP and what it means for companies.
It would be easy to characterise the 2017 Federal Budget as a ‘no surprises’ Budget, with most major policy initiatives announced by the Government in the weeks leading up to its delivery. However, what isn’t contained within the Budget may come as a surprise to some sectors of the Australian economy, with some expected announcements simply not materialising.
Glasshouse Advisory IP experts have analysed this year’s Budget to understand what impact it will have on driving innovation within the Australian economy and, more importantly, how it will incentivise Australian businesses to invest in, develop, protect and commercialise intangible assets and intellectual property.
Focus on Transfer Pricing
In the lead up to the 2017 Budget announcement, there was strong speculation that the Government would introduce additional initiatives to address perceived tax evasion by multinational enterprises. However, with the upcoming implementation of the Diverted Profits Tax (DPT) and previously announce initiatives (such as Multinational Anti-Avoidance Law (MAAL)), it was difficult to anticipate what additional measures the Government could introduce in the area of transfer pricing.
Whilst the Government’s multinational tax avoidance measures were strongly reinforced throughout the 2017 Budget, no ground-breaking new measures were introduced, other than strengthening of the Multinational Anti-Avoidance Law (MAAL) by ensuring that foreign trusts and partnerships are subject to MAAL.
Within the Budget papers is confirmation of the Government’s commitment to adopt the OECD’s guidance on matters associated with transfer pricing. In this regard, earlier this year, the Government introduced a bill seeking to amend Australia’s transfer pricing legislation to adopt the latest version of the OECD’s transfer pricing guidelines, including recommendations on how intellectual property and hard to value intangibles should be treated from a transfer pricing perspective. In adopting this guidance, the Government is acknowledging that intellectual property is highly mobile and commonly used by multinational enterprises as a profit shifting mechanism. As such, the treatment of IP by multinationals will continue to be an area of focus for the ATO.
Further information regarding the Government’s latest measures to fight international profit shifting and the focus on IP can be found here
Funding to advance manufacturing
With the likes of Holden, Ford and Toyota all closing their doors in the last few years, the 2017 Budget emphasised the Government’s focus on creation of ‘high-value’ or ‘advanced’ manufacturing industries to replace the jobs and revenue the automotive industry has left behind.
The 2017 Budget contains the Government’s latest measure to support the development of the Australian manufacturing section, in the form of a new $100 million Advanced Manufacturing Fund. The Fund, which is focused on generating intellectual property through the development of advanced manufacturing capabilities, includes:
- $47.5 million for a new Advanced Manufacturing Growth Fund, to fund up to a third of the project cost of capital upgrades to establish and expand high value manufacturing in South Australia and Victoria;
- $4 million for the Advanced Manufacturing Growth Centre, committed over two years, to support small scale and pilot research projects in advanced manufacturing;
- $20 million under the Cooperative Research Centre – Projects initiative, committed over two years, for larger scale advanced manufacturing research projects;
- $10 million to establish Innovation Labs in South Australia and Victoria to serve industry in a variety of roles including test centre facilities and business capability development; and
- $5 million to maintain engineering excellence by investing in student research at universities, technology institutions and in industry.
This is a strong and direct response to the departure of the automotive industry and the advanced manufacturing jobs often associated with it. However, long term growth and the development of a sustainable advanced manufacturing economy in Australia requires more extensive action and the lack of initiatives in the Budget in this area came as a surprise to many, particularly given the Federal Government’s focus in this area.
As well as assisting businesses evolve into high-value manufacturers, it’s a commonly held view within the business section that Government needs further tax and regulatory reform to ensure Australia retains the results of new advanced manufacturing initiatives. An example of such a measure is the preferential tax treatment for profits generated from the exploitation of intellectual property (IP). A number of nations (particularly in Europe), have adopted these so-called ‘patent box’ or ‘innovation-box’ initiatives, primarily through programs that provide a lower corporate tax rate for profits generated from the exploitation of IP. These patent box type programs have demonstrated success, with businesses reportedly establishing new high-value manufacturing operations in patent-box nations.
Know-how, patents, trade secrets and other forms of IP are the hallmarks of a business engaged in advanced manufacturing. An incentive program targeted at businesses that develop and then exploit these assets would encourage developers of IP to keep these intangible assets in Australia (rather than transfer them overseas to low tax jurisdictions), which would ensure that Australia reaps the long-term benefits of programs like the Advanced Manufacturing Fund.
Good news for small business
As suspected, the Federal government has extended the $20,000 instant asset tax write-off scheme for small businesses for an additional 12 months. The Government’s measures extends the ability of small businesses (those with an annual turnover of less than $10 million) to immediately deduct eligible assets, up to the value of $20,000, until 30 June 2018.
Not only does this immediate deduction afford small businesses potential cashflow benefits associated with the immediate deduction of asset purchases; the extension of this scheme allows strategic business owners to potentially maximise the benefit derived from accessing the R&D Tax Incentive program. The purchase or acquisition of an asset is not eligible for a notional deduction under the R&D Tax Incentive program, however the asset’s depreciation is. As such, the utilisation of the government’s instant asset write-off scheme affords small business the ability to access a significant cashflow benefit if purchasing the asset can be incorporated as part of a refundable R&D tax offset claim.
The refundable R&D tax offset provides companies with a 43.5% cash refund on eligible R&D expenditure. As such, a small business in a tax loss position could purchase a $20,000 asset in June, and receive $8,700 back when it lodges its Income Tax Return in July.
Not only will the extension of this scheme assist small business to reinvest in their business and to replace/upgrade assets, it will also provide a 12 month reprieve on asset purchasing decisions. It provides small business with an opportunity to continue to think strategically about when R&D purchases are made. Bookending a purchase of an R&D asset under the $20,000 threshold, and the lodgement of a business’s Income Tax Return, around the end of a year of income is an easy and straightforward method of improving cash flow.
The extension of this popular program is likely to be warmly received by small businesses.
No additional funds for EMDG
With the Export Market Development Grant (EMDG) program oversubscribed for the last two years, it was a disappointing surprise that there was no increase in funding to what is the Government’s cornerstone program for encouraging exports by SMEs. Interestingly, the only change announced was that the Budget for the EMDG program has been moved into the “Promotion of Australia’s export and other international economic interests” portfolio… interesting!
While there were no new announcements regarding the EMDG program in the 2017 Budget, earlier this year Austrade did confirm some minor changes to the 2017 EMDG program, details of which can be found here. It would seem that, with only minor changes to the program announced, and with no increase in funding in the 2017 Budget, the EMDG program will continue to be oversubscribed in the 2017 year, a disappointing outcome for those businesses seeking to break into export markets.
IP Australia – additional funding for corporate activities
The Budget announced $1.5 million over four years from 2017 18 (and commits to $0.4 million per year ongoing) to support activities within IP Australia.
The Public Governance, Performance and Accountability Act 2013 established an Intellectual Property Special Account (the special account). The legislation had a sunset clause of 1 April 2017.
This special account, and associated Interest Equivalency Payment, is to assist IP Australia to fund the development and administration of intellectual and industrial property systems, including those property rights related to inventions, trademarks, designs and plant breeders’ rights. This is funded through an Interest Equivalency Payment.
Although the Intellectual Property Special Account 2017 was enacted in March 2017 and sunsets on 1 April 2027, the Government has committed to provide $400,000 per year, ongoing, to support ‘corporate activities’ within IP Australia.
New corporate tax rates v R&D
R&D Incentive – no new changes, but calculating the benefit is becoming challenging
There were no changes announced to the R&D Tax Incentive program, including the refundable R&D Tax Credit, so all companies with an aggregated turnover of less than $20 million who are in tax losses will continue to be able to access this lucrative source of cashflow. However, already legislated changes will mean that the R&D Tax Incentive rates will reduce to 43.5% for companies with aggregated turnover under $20 million and 38.5% for all other companies with an income year starting on or after 1 July 2016.
There is no doubt that calculating a company’s R&D tax benefit is becoming more complex. During the 2017/2018 year, small companies with an aggregated turnover of less than $15 million will enjoy a lowering of the corporate tax rate to 27.5%. This means that the R&D Tax Incentive for those companies will actually increase for the 2017/2018 year to 16% if they are in a tax paying position (i.e. 43.5% R&D Tax Credit – 27.5% Corporate Tax Rate = 16% marginal benefit). The 43.5% Refundable R&D Tax remains unchanged.
Companies with aggregated turnovers of $15 million and greater will see the benefit of claiming the R&D Tax Incentive effectively reduced by 1.5% for the 2017/2018 year, compared to previous years. This is due to the fact that the Government has not lowered the corporate tax rate for this category of companies, which was expected when the R&D tax rate was lowered.
The following table shows how this will impact companies during the 2017/2018 year:
|Aggregated turnover||Corporate tax rate||R&D tax offset||Marginal tax benefit from R&D per $100k of spend when tax paying||Maximum cash refund from R&D per $100k R&D spend when tax losses|
|< $15mil||27.5%||43.5%||$16,000 (↑$1k)||$43,500 (↓$1.5k)|
|$15 – <$20mil||30%||43.5%||$13,500 (↓$1.5k)||$43,500 (↓$1.5k)|
|>=$20 mil||30%||38.5%||$8,500 (↓$1.5k)||–|
The already legislated cuts to the corporate tax rate will be phased in over the next few years, eventually applying to all companies with less than $50 million aggregated turnover by the 2018/2019 year. Over the next few years, the marginal benefit from claiming the R&D Tax Incentive will apply differently to company tax payers, depending on their aggregated turnover, and calculating the marginal benefit will become increasing more difficult for those companies forecasting aggregated turnover close to the relevant brackets. This level of change and uncertainty make it increasingly difficult for companies to plan their R&D spend and could act as a disincentive for R&D innovators to invest in Australia.
Don’t forget changes to IP depreciation
In addition to the Budget extending the $20,000 instance asset write off for small businesses, the Federal Government has previously announced changes to the way businesses depreciate intangible assets, a change that will deliver significant benefits for intangible assets acquired after 1 July 2016. Under Australia’s current tax law, taxpayers are required to depreciate certain intangible assets (such as patents, registered designs, software, etc) at a prescribed statutory rate, a rate that does not take into account the economic life of that asset. Draft legislation (which was recently introduced into the lower house of Federal Parliament and is expected to pass all hurdles) will enable businesses to self-assess the tax effective life for intangibles acquired after 1 July 2016. This significant change to the current tax laws will deliver a cash flow advantage (through an increased tax expense) to businesses acquiring intangible assets, while also reducing the cost of investing in this type of asset. With the 2017 financial year coming to a close, now is the time to engage with industry experts to assist in identifying the economic life of intangible assets acquired after 1 July 2016.
Find out more about Australia as the innovation and FinTech nation as part of the Budget announcement.
This article first appeared on Glasshouse Advisory’s website on 10 May 2017