New R&D tax credit to start on 1 July 2011

Australian companies are being encouraged to become more innovative and globally competitive via a new R&D Tax Credit incentive being introduced by the Federal Government. The Bills to establish the R&D Tax Credit are currently before Parliament and the scheme is expected to commence on 1 July 2011.

The new R&D Tax Credit will replace the existing R&D Tax Concession scheme. It will provide a targeted tax offset designed to encourage more companies to engage in research and development in Australia.

The entities that will be eligible for the new R&D Tax Credit are:

  • Australian corporations
  • corporations that are Australian residents for tax purposes
  • foreign corporations that carry on R&D activities though a permanent establishment in Australia
  • corporations acting as trustee of a public trading trust.

This represents an expansion on the kinds of entities presently eligible for the R&D Tax Concession. By expanding access for foreign corporations the Government hopes to strengthen Australia’s negotiating position in future tax treaties and provide an inducement for more companies to conduct their R&D activities in Australia.

The R&D Tax Credit will apply to activities and expenditure in income years commencing on or after 1 July 2011, while the existing R&D Tax Concession will apply to activities and expenditure in income years prior to 1 July 2011.

The new scheme will deliver a 45 per cent refundable tax credit to companies with an aggregated turnover of less than $20 million and a 40 per cent non-refundable offset to all others.

Under the scheme, tax offsets are applied directly to a company’s income tax liability to reduce the amount of tax they have to pay. The 45 per cent R&D Tax Credit will be a refundable tax offset, which means that once a company’s tax liability is reduced to zero, companies may access a cash refund for any unused offset amount. The 40 per cent R&D Tax Credit will be a non-refundable tax offset, which means that companies cannot access a cash refund for any unused offset amount once their liability has been reduced to zero. However, these excess offsets may be carried forward into future income years.

The Government will provide quarterly payments for small and medium businesses from 1 January 2014. As a result these firms will get their credit sooner, thereby improving their cash flow and incentive to invest in R&D.

An advisory group will be established through the Innovation Australia Board to monitor the implementation and operation of the Credit scheme. The Government, through AusIndustry, will run an extensive education program to ensure firms are kept up to date.