Let the ATO help fund your business: The new and improved Research and Development Credit

On 12 May 2009 the Government announced it will replace the existing Research & Development (‘R&D’) Tax Concession with a new R&D Tax Credit. The R&D Tax Credit is planned to come into effect from 1 July 2010.

The benefit of a refundable tax credit over a tax concession is that R&D companies are often cash poor and ideas rich. R&D outlayed during the year can be converted into a ‘cash credit’ to help fund further R&D rather than extending tax losses hoping that these will offset future income (the traditional concessional approach).

On 13 May 2010 new R&D tax incentive legislation was introduced into Parliament. The new R&D tax incentive is contained in the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010, available on the Parliament of Australia web site.

The new R&D Tax Credit is a broad-based and market driven incentive package. The new R&D tax incentive provides more generous benefits for eligible activities than the existing concession and is better targeted towards R&D that benefits Australia. It is also substantially simpler and accompanied by improved administrative arrangements. The new R&D tax incentive replaces the existing R&D Tax Concession for all income years starting on or after 1 July 2010.

The two core components of the package are: 

  • a 45 per cent refundable tax credit (the equivalent to a 150 per cent concession) for eligible entities with an aggregated turnover of less than $20 million per annum;
  • a non-refundable 40 per cent R&D tax credit (the equivalent of a 133 per cent deduction) for all other eligible entities.

Accompanying the change of rates and delivery mechanism is an adjusted definition of eligible ‘R&D activities’ that will ensure that the incentive is available in circumstances consistent with the underlying rationale for government intervention.

An interim measure, prior to the introduction of the R&D Tax Credit, increased the R&D expenditure cap for the R&D Tax Concession Offset from $1 million to $2 million for income years starting on or after 1 July 2009 making the concession easier to access.

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