Date posted: 7/10/2020

Australian Federal Budget 2020-21 - R&D changes

The Government has listened to representations made by CA ANZ and others to change its stance on R&D.

In brief

  • CA ANZ’s top three R&D recommendations have been addressed in the Budget
  • The revised R&D intensity regime is workable
  • The planned $4 million cap on refundable R&D offset will not proceed, and R&D changes apply prospectively from 1 July 2021

CA ANZ's top three recommendations to remedy concerns with the proposed R&D tax incentive changes have been addressed:

  • The R&D intensity regime is now workable as it retains the non-refundable R&D tax benefit of 8.5 cents in the dollar and implements a much more realistic and attractive incentive of 16.5 cents in the dollar that will provide a 'stretch' goal for innovative businesses.
  • The proposed $4 million cap on the refundable R&D offset is not proceeding.
  • The R&D changes will apply prospectively from 1 July 2021, not retrospectively, which provides certainty and the necessary time for business to plan to implement the changes.

The announced changes are a win for R&D and innovation as they improve on the R&D tax benefit for small companies (less than $20 million aggregated turnover) – offering 18.5c/$ fully refundable tax benefit.

In addition, the measures retain the R&D tax benefit at the same level of 8.5c/$ for most large companies ($20 million or more aggregated turnover), while also providing a serious additional reward for greater R&D intensity – 16.5c/$ (an extra 8c/$) on the incremental expenditure above 2% intensity ratio, which will attract and influence those large companies that can substantially increase their intensity.

The new R&D intensity regime is a lot more realistic and achievable in that the Government has merged the first two tiers into one, in effect increasing the entry level rate and combining that with the entry level intensity ratio of 0% – 2%, which restores the non-refundable offset to the existing investable R&D tax benefit. This will retain participation in the R&D program. 

The decision not to proceed with the $4 million cap on the refundable R&D offset is also welcome, particularly for expenditure-intensive start-ups that are in a cash flow-poor and capital-hungry phase.

Biotech and similar research companies will also be pleased they can continue their previous levels of investment in critical clinical trials, which may not have been covered by the proposed limited carve out from the cap.

The previously announced increase to the R&D expenditure threshold from $100 million to $150 million per annum will go ahead unchanged.

These changes to the R&D tax incentive will create new jobs, provided these measures are legislated and kept certain and stable. The R&D measures are forecast to cost an extra $2.0 billion over the forward estimates period.

CA ANZ would still like to see the Australian Taxation Office change its view on the interaction between the R&D 'at risk' provision and JobKeeper payments, as set out in Draft Determination TD 2020/D1.

The changes are a win for R&D and innovation.

In our view, the 'at risk' clawback provision does not apply to remove the R&D tax incentive benefit from employers that pay R&D salary and wages and also receive JobKeeper payment subsidies in respect of those employees. 

Budget Paper No 2

Read more

Australian Federal Budget 2020-21

View the Australian Federal Budget overview, commentary, opinions and media releases brought down on 6 October 2020.

Read more

Search related topics