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2019
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
TREASURY LAWS AMENDMENT (RESEARCH AND DEVELOPMENT TAX
INCENTIVE) BILL 2019
EXPLANATORY MEMORANDUM
(Circulated by authority of the
Treasurer, the Hon. Josh Frydenberg MP)
Table of contents
Glossary................................................................................................. 1
General outline and financial impact ...................................................... 3
Chapter 1 Better targeting the Research and Development
Tax Incentive ............................................................... 5
Chapter 2 Enhancing the integrity of the Research and
Development Tax Incentive ....................................... 19
Chapter 3 Improving the administration of the Research
and Development Tax Incentive ................................ 41
Chapter 4 Regulation impact statement ..................................... 51
Chapter 5 Statement of Compatibility with Human Rights .......... 73
Glossary
The following abbreviations and acronyms are used throughout this
Explanatory Memorandum.
Abbreviation Definition
Bill Treasury Laws Amendment (Research and
Development Tax Incentive) Bill 2019
Commissioner Commissioner of Taxation
Decision-making Principles Industry Research and Development
Decision-making Principles 2011
Incentive the Research and Development Tax Incentive
IR&D Act Industry Research and Development
Act 1986
ISA Innovation and Science Australia
ITAA 1936 Income Tax Assessment Act 1936
ITAA 1997 Income Tax Assessment Act 1997
R&D Research and development
Review Review of the R&D Tax Incentive
SES Senior Executive Service
TAA 1953 Taxation Administration Act 1953
Transitional Provisions Act Income Tax (Transitional Provisions)
Act 1997
1
General outline and financial impact
Better targeting the Research and Development Tax Incentive
Schedule 1 to the Treasury Laws Amendment (Research and
Development Tax Incentive) Bill 2019 (the Bill) reforms the Research and
Development (R&D) Tax Incentive (the Incentive) to better target the
program and improve its effectiveness and integrity.
Schedule 2 to the Bill enhances the integrity of the Incentive by ensuring
that R&D entities cannot obtain inappropriate tax benefits and by clawing
back the benefit of the Incentive to the extent an entity has received
another benefit in connection with an R&D activity.
Schedule 3 to the Bill improves the administrative framework supporting
the Incentive by making information about R&D expenditure claims
transparent, enhancing the guidance framework to provide certainty to
applicants and streamlining administrative processes.
Date of effect: All of the amendments made by the Bill commence on the
first 1 January, 1 April, 1 July or 1 October to occur after the day the Act
receives the Royal Assent. The amendments in the Bill generally apply to
income years commencing on or after 1 July 2019. Some administrative
amendments in Schedule 3 apply from commencement.
Proposal announced: The Bill implements the legislative measure Better
targeting the research and development tax incentive from the 2018-19
Budget with changes including a later application date and refinements to
the intensity-based R&D tax offset for large R&D entities.
Financial impact: These amendments are estimated to have a gain to the
budget of $1.8 billion over the current forward estimates period in fiscal
balance terms:
2019-20 2020-21 2021-22 2022-23
$175.0m $435.0m $585.0m $570.0m
The financial impact has been revised since the 2018-19 Budget to
account for the impact of policy and parameter variations, it does not
include the impact of the departmental funding and compliance measures
also announced in the 2018-19 Budget.
Human rights implications: The Bill does not raise any human rights
issue. See Statement of Compatibility with Human Rights -- Chapter 5,
paragraphs 5.1 to 5.6.
Compliance cost impact: The reforms are estimated to result in a total
average annual regulatory cost for businesses of $26.3 million.
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
Summary of regulation impact statement
Regulation impact on business
Impact: The reforms are estimated to result in a total average annual
regulatory cost for businesses of $26.3 million.
Main points:
• The Government is implementing reforms to the Research
and Development Tax Incentive. The reforms will refocus
support towards supporting additional high intensity R&D
expenditure, while also ensuring the program's effectiveness
and integrity.
• The 2016 Review of the R&D Tax Incentive found that the
program falls short of meeting its stated objectives of
supporting additionality and spillovers. The Review made
several recommendations to address this.
• The reforms are expected to result in an overall compliance
cost, arising from minor changes to the registration and
claims processes, as well as the initial adjustment to the new
program.
4
Chapter 1
Better targeting the Research and
Development Tax Incentive
Outline of chapter
1.1 Schedule 1 to the Bill reforms the Research and
Development (R&D) Tax Incentive (the Incentive) to better target the
program, and improve its effectiveness and integrity.
Context of amendments
The R&D Tax Incentive
1.2 The Incentive was introduced in 2011. The Incentive is intended
to encourage R&D activities that might not otherwise be conducted in
cases where the new knowledge gained is likely to have a wider
Australian economic benefit. That is, the Incentive is intended to support
additionality in R&D activities and spillover benefits to the broader
economy.
1.3 Division 355 of the ITAA 1997 provides R&D tax offsets to
R&D entities for a range of expenses and depreciation costs incurred on
R&D activities. There are currently two R&D tax offsets available:
• a 43.5 per cent refundable tax offset available to most small
R&D entities - those with an aggregated turnover of less than
$20 million. The refundable offset can be refunded as a cash
payment to an R&D entity if the offset exceeds the entity's
income tax liability; and
• a 38.5 per cent non-refundable tax offset available to larger
R&D entities and R&D entities controlled by one or more
exempt entities. A non-refundable tax offset may be used to
reduce an R&D entity's income tax liability for an income
year but any remaining excess must be carried forward to be
applied in future income years.
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
1.4 The basis for calculating R&D tax offsets is the concept of a
notional deduction. A notional deduction is generally recognised for
expenditure (Subdivision 355-D) on R&D activities and depreciation on
assets held for R&D purposes (Subdivision 355-E) subject to conditions.
These deductions are referred to as notional because they are only used to
calculate an R&D entity's entitlement to the R&D tax offset and for some
other discrete purposes (section 355-105). That is, the entitlement to the
Incentive for a notional deduction replaces any entitlement to an
underlying tax deduction.
1.5 The value of the Incentive (the 'incentive component') is
generally the difference between the R&D entity's corporate tax rate and
the R&D tax offset rate (plus the benefit of refundability where it applies).
For example, the incentive component of a large R&D entity receiving the
38.5 per cent non-refundable offset and paying the 30 per cent corporate
tax rate is generally 8.5 per cent.
1.6 Under the Government's reforms to corporate tax rates, the tax
rate for companies with an aggregated turnover of less than $50 million
has been reduced to 27.5 per cent and will be further reduced in future
income years. As the corporate tax rate has been lowered from 30 per cent
for some taxpayers, the value of the incentive component of the R&D tax
offsets has increased for these entities.
The $100 million expenditure threshold
1.7 The Incentive is subject to a $100 million expenditure threshold,
sometimes referred to as an expenditure cap. Expenditure on R&D
activities (notional deductions) in excess of $100 million is not eligible for
the full rate of the relevant R&D tax offset. Rather, these notional
deductions give rise to an offset at the R&D entity's corporate tax rate.
That is, excess notional deductions give rise to the same benefit as if the
expenditure had instead been claimed as an ordinary tax deduction,
without any incentive component.
1.8 The $100 million expenditure threshold and some associated
provisions are legislated to sunset on 1 July 2024 under Part 2 of
Schedule 1 to the Tax Laws Amendment (Research and Development)
Act 2015.
Review of the R&D Tax Incentive
1.9 The Government's reforms are made in response to the
recommendations of the 2016 Review of the R&D Tax Incentive (the
Review).
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Better targeting the Research and Development Tax Incentive
1.10 The Review was commissioned as part of the Government's
National Innovation and Science Agenda. The Review Panel was chaired
by the then Chair of Innovation and Science Australia (ISA), Mr Bill
Ferris AC, Australia's Chief Scientist, Dr Alan Finkel AO, and the then
Secretary to the Treasury, Mr John Fraser. The Review Panel was asked to
identify opportunities to improve the effectiveness and integrity of the
program, including how its focus could be sharpened to encourage
additional R&D activities in Australia.
1.11 The Review found that the Incentive was failing to fully achieve
its objectives of generating additional R&D activities and was not well
targeted, providing benefits for R&D activities that would have been
undertaken without the Incentive.
1.12 The Review also found that the cost of the Incentive had
exceeded initial estimates. The cost of the Incentive was expected to be
$1.8 billion per annum when it was introduced in 2011-12. In 2016-17, it
cost around $3 billion.
1.13 The Review made numerous recommendations to improve the
integrity and effectiveness of the program and to promote its objectives.
The Review also made recommendations to improve the administration of
the Incentive. The ISA 2030 Strategic Plan, published in January 2018,
made alternative recommendations informed by feedback provided on the
Review report. A number of the Review's recommendations were adopted
by Government in the 2018-19 Budget.
Summary of new law
1.14 Schedule 1 to the Bill improves the targeting of the Incentive
through the following changes:
• increasing the R&D expenditure threshold from $100 million
to $150 million and making the threshold a permanent
feature of the law;
• linking the R&D tax offset for refundable R&D tax offset
claimants to claimants' corporate tax rates plus a
13.5 percentage point premium;
• capping the refundability of the R&D tax offset at $4 million
per annum (however, offset amounts that relate to
expenditure on clinical trials do not count towards the cap);
and
• increasing the targeting of the Incentive to larger R&D
entities with high levels of R&D intensity, reducing the
benefits provided to certain entities undertaking R&D
activities and increasing the benefit to others.
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
1.15 In particular, large R&D entities with aggregated turnover of
$20 million or more for an income year are entitled to an R&D tax offset
equal to their corporate tax rate plus one or more marginal intensity
premiums.
1.16 The intensity premiums apply to notional deductions within a
range of R&D intensity where the R&D entity's R&D expenditure
(notional deductions) are expressed as a proportion of the entity's total
expenses.
1.17 In addition, Schedule 2 to the Bill makes a number of
amendments to improve the integrity of the Incentive and Schedule 3 to
the Bill makes a number of amendments to improve the administration
and transparency of the Incentive. See Chapters 2 and 3 of this
Explanatory Memorandum for more information.
8
Better targeting the Research and Development Tax Incentive
Comparison of key features of new law and current law
New law Current law
The expenditure threshold
The R&D expenditure threshold is The R&D expenditure threshold
increased to $150 million. applies to eliminate the incentive
component of the R&D tax offset in
relation to notional deductions in
excess of $100 million.
The R&D expenditure threshold is a The R&D expenditure threshold is
permanent feature of the law. legislated to cease on 1 July 2024.
The R&D Tax Offset for small R&D entities
R&D entities with aggregated R&D entities with aggregated
turnover of less than $20 million are turnover of less than $20 million are
generally entitled to an R&D tax generally entitled to an R&D tax
offset rate equal to their corporate tax offset rate of 43.5 per cent.
rate plus a 13.5 per cent premium.
The amount of a refund that an R&D R&D entities with aggregated
entity can receive is capped at turnover of less than $20 million are
$4 million per annum. entitled to a tax refund for any R&D
Offset amounts that relate to tax offset they receive in excess of
expenditure on clinical trials do not their income tax liabilities.
count towards the cap and remain
refundable.
The R&D Tax Offset for large R&D entities
R&D entities with aggregated R&D entities with aggregated
turnover of $20 million or more are turnover of $20 million or more are
entitled to an R&D tax offset equal to entitled to a non-refundable R&D tax
their corporate tax rate plus a offset at a rate of 38.5 per cent.
premium based on the level of their
incremental R&D intensity for their
R&D expenditure.
Detailed explanation of new law
Increasing the expenditure threshold
1.18 The $100 million expenditure threshold is increased to
$150 million per annum. [Schedule 1, item 11, subsection 355-100(3) of the
ITAA 1997]
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
1.19 The increase allows R&D entities to claim additional amounts of
concessional R&D tax offset on R&D activities. The purpose of this
amendment is to increase the incentive for large R&D entities to continue
to engage in R&D activities when their R&D expenditure exceeds
$100 million.
1.20 The current law provides that the expenditure threshold will
cease on 1 July 2024 and requires the Government to conduct a review of
the threshold after 5 March 2020. In light of the 2016 Review and the
changes to the threshold adopted by the Government, the requirement for
the review is repealed and the increased threshold is made a permanent
feature of the law. [Schedule 1, items 13, 15 and 16, section 355-750 of the
ITAA 1997, table item 3 in subsection 2(1) of the Tax Laws Amendment (Research and
Development) Act 2015 and Part 2 of Schedule 1 to that Act]
The refundable R&D tax offset for small R&D entities
1.21 An R&D entity with aggregated turnover of less than
$20 million for an income year is generally entitled to a refundable R&D
tax offset equal to their corporate tax rate plus 13.5 percentage points.
[Schedule 1, item 6, table item 1 in subsection 355-100(1) of the ITAA 1997]
1.22 This refundable offset does not apply to an R&D entity
controlled by one or more exempt entities. These R&D entities are instead
entitled to the non-refundable R&D tax offset available to R&D entities
with aggregated turnover of $20 million or more. [Schedule 1, item 7, table
item 2 in subsection 355-100(1) of the ITAA 1997]
The cap on refundable R&D tax offsets for small R&D entities
1.23 Only the first $4 million of any R&D tax offset is a refundable
tax offset. Any excess amount of R&D tax offset must be carried forward
as a non-refundable tax offset. [Schedule 1, item 4, subsection 67-30(1A) of the
ITAA 1997]
1.24 However, amounts of the R&D tax offset arising from R&D
activities that form part of a clinical trial do not count towards the
$4 million cap and may be included in a refundable tax offset. The
objective of this exemption is to incentivise clinical trials that have the
potential to demonstrate a net improvement in health outcomes.
[Schedule 1, item 4, subsections 67-30(1A) and (1B) of the ITAA 1997]
1.25 Non-refundable R&D tax offsets are applied in priority to
refundable R&D tax offsets (table items 35 and 40 in subsection 63-10(1)
of the ITAA 1997). This ensures that an R&D entity's refund cap is not
affected by amounts of taxable income the entity would have but for the
application of the R&D tax offsets.
10
Better targeting the Research and Development Tax Incentive
Example 1.1 The refund cap and expenditure on clinical trials
In the 2019-20 income year, Aperture Research has aggregated
turnover of $15 million. Without taking into account its R&D
activities, Aperture Research has an income tax liability of $500,000.
Aperture Research has incurred $20 million on R&D activities. Of this
expenditure, $5 million is incurred conducting a clinical trial of a new
medical device.
Aperture Research is entitled to a combined R&D tax offset of
$8.2 million, which is $20 million multiplied by the entity's R&D tax
offset rate of 41 per cent (where the offset rate is comprised of the
entity's corporate tax rate of 27.5 per cent plus a 13.5 percentage point
premium).
$2.05 million of the tax offset (41 per cent of $5 million) is attributable
to the clinical trial.
$6.15 million of the tax offset (41 per cent of $15 million) is
attributable to other R&D activities.
Aperture Research is entitled to a refundable tax offset of
$6.05 million. Because the value of the offset not attributable to a
clinical trial exceeds the $4 million cap, Aperture Research's
refundable tax offset is $4 million plus the offset attributable to its
R&D activities forming part of the clinical trial ($2.05 million).
The remaining $2.15 million (from the excess above the $4 million
cap) is a non-refundable tax offset.
The $2.15 million non-refundable tax offset is applied in priority to the
refundable tax offset.
$500,000 of the non-refundable tax offset can be applied to reduce
Aperture Research's income tax liability for the 2019-20 income year
to nil. The value of the remaining $1.65 million non-refundable tax
offset is not lost, as it can be carried forward and is available to be
applied against a tax liability in future income years.
After applying the non-refundable tax offset against its income tax
liability for the 2019-20 income year, Aperture Research is able to
apply the refundable tax offset to obtain a cash refund of $6.05 million.
1.26 A clinical trial is a planned study of the safety or efficacy in
humans of an intervention (including a medicine, vaccine, treatment,
diagnostic procedure or medical device) with the aim of achieving at least
one of the following:
• the discovery, or verification, of clinical, pharmacological or
pharmacodynamic effects;
• the identification of adverse reactions or adverse effects;
• the study of absorption, distribution, metabolism or
excretion.
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
1.27 An intervention in humans in this context includes any
technique, treatment or diagnostic procedure for improving human health,
and includes any good that is a therapeutic good for the purposes of the
Therapeutic Goods Act 1989. For example, the definition includes:
• medicines (including vaccines);
• medical devices (including in-vitro diagnostics and
software);
• cells, tissues and other biological products;
• surgical procedures; and
• radiological procedures.
1.28 The discovery or verification of clinical effects is a broad
concept and includes, for example, the immunogenicity of vaccines i.e.
the ability of the vaccine to provoke an immune response in a human. It
also includes the performance of medical devices.
1.29 This definition only applies for the purposes of the Incentive and
does not affect the meaning of the term 'clinical trial' as used in other
legislation. [Schedule 1, items 4 and 14, subsections 67-30(1C) and 995-1(1)
(definition of 'clinical trial') of the ITAA 1997]
1.30 The clinical trial exemption only applies for the purposes of the
R&D tax offset if an R&D entity has registered an activity as both an
R&D activity and an activity that forms part of a clinical trial. Similarly,
the exemption only applies to expenditure on clinical trials if the
expenditure is on R&D activities registered with the Board of ISA.
1.31 Amendments are made to the IR&D Act to provide the Board of
ISA with the power to register R&D activities forming part of a clinical
trial. The Board of ISA may also make findings binding on the
Commissioner of Taxation (the Commissioner) about whether an R&D
entity's activities satisfy the definition of clinical trials. The Board of ISA
may make these findings as part of the registration process for the R&D
entity's R&D activities more generally or as an advance finding on
application by the entity. [Schedule 3, items 4 and 6 to 15, subsection 4(1)
(definition of 'clinical trial'), subsection 27A(1), paragraphs 27B(1)(e) and (f), 27J(1)(e)
and (f), and 28A(1)(ca) and (cb), section 28, Note 2 to subsection 27B(1), Note 3 to
subsection 27E(2), Note 3 to subsection 277H(2), and Note 2 to subsection 27J(1) of
the IR&D Act]
1.32 The Board of ISA may also make public determinations that are
not specific to a particular R&D entity but that provide general guidance,
including in relation to the activities it will consider form part of a clinical
trial (see paragraphs 3.24 to 3.38).
12
Better targeting the Research and Development Tax Incentive
Intensity-based R&D tax offset for large R&D entities
1.33 R&D entities with aggregated turnover of $20 million or more
for an income year are entitled to an R&D tax offset equal to their
corporate tax rate plus marginal intensity premiums determined with
reference to the R&D intensity of their R&D expenditure on an
incremental basis. [Schedule 1, items 7 and 9, table item 3 in subsection 355-100(1)
and subsection 355-100(1A) of the ITAA 1997]
1.34 The intensity premiums in the table below apply to notional
deductions within a range of R&D intensity for R&D expenditure where
notional deductions are expressed as a proportion of the R&D entity's
total expenses:
Table 1.1 R&D tax offset intensity premiums
Tier R&D intensity range Intensity premium
1 Notional deductions representing up to and 4.5 percentage points
including 4 per cent of total expenses
2 Notional deductions representing greater 8.5 percentage points
than 4 per cent and up to and including
9 per cent of total expenses
3 Notional deductions representing greater 12.5 percentage points
than 9 per cent of total expenses
Example 1.2 The R&D tax offset for large R&D entities
Contrast Industries has notional deductions of $160 million in the
2019-20 income year, exceeding the $150 million expenditure
threshold. In the same income year, Contrast Industries had
expenditure of $1 billion. Its aggregated turnover exceeds $50 million,
meaning it is subject to the 30 per cent corporate tax rate.
Contrast Industries has an R&D intensity of 15 per cent ($150 million
divided by $1 billion). The portion of the R&D tax offset calculated in
relation the excess $10 million is calculated separately (see
paragraph 1.37).
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
Contrast Industries' R&D tax offset for the income year is calculated
as follows:
Tier Intensity R&D Notional Offset
range premium deductions amount
applied
Tier 1 0-4% 4.5% $40m $13.8m
Tier 2 4-9% 8.5% $50m $19.25m
Tier 3 >9% 12.5% $60m $25.5m
Excess NA Nil $10m $3m
Totals: $160m $61.55m
R&D intensity
1.35 To calculate the R&D tax offset, a large R&D entity must
determine its R&D intensity. The R&D intensity is the proportion of the
R&D entity's total expenses spent on R&D expenditure for the income
year:
𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑑𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛�
𝑅&𝐷 𝑖𝑛𝑡𝑒𝑛� 𝑖𝑡𝑦 =
𝑇𝑜𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛� 𝑒�
1.36 This is intended to provide a higher rate of support for
incremental R&D expenditure to R&D entities that devote a significant
portion of their overall operations to R&D eligible for support under the
Incentive.
Notional deductions
1.37 Notional deductions in excess of the $150 million expenditure
threshold do not attract an intensity premium and are not counted for the
purposes of calculating an R&D entity's R&D intensity (see Example
1.2). [Schedule 1, item 11, paragraph 355-100(3)(a) of the ITAA 1997]
1.38 If an R&D entity's notional deductions for an income year are
less than $20,000, the entity's notional deductions for the purposes of
calculating the entity's R&D tax offset only includes the notional
deductions that satisfy the criteria in subsection 355-100(2): that the
expenditure was incurred to a research service provider registered under
Division 4 of Part III of the IR&D Act or was incurred under the
Cooperative Research Centre Program. [Schedule 1, item 10,
subsection 355-100(2) of the ITAA 1997]
Total expenses
1.39 An R&D entity's total expenses are reported in their company
tax return. The expenses reported at item six of a company income tax
return are the expense amounts taken from the company's financial
statements. [Schedule 1, item 12, section 355-115 of the ITAA 1997]
14
Better targeting the Research and Development Tax Incentive
1.40 The Australian Accounting Standards Board's Framework for
the Preparation and Presentation of Financial Statements defines
'expenses' (at paragraph 70(b)) as:
• decreases in economic benefits during the accounting period
in the form of outflows or depletions of assets or incurrences
of liabilities that result in decreases in equity, other than
those relating to distributions to equity participants.
1.41 For companies that prepare a financial report for the income
year in accordance with the accounting standards and other
pronouncements issued by the Australian Accounting Standards Board,
those standards and pronouncements apply. For other entities, total
expenses are worked out in accordance with other commercially accepted
principles relating to accounting. [Schedule 1, item 12, paragraph 355-115(2)(a)
of the ITAA 1997]
1.42 An R&D entity's notional deductions are always included in its
total expenses. If an amount of notional deductions is not otherwise
included in an entity's total expenses, an adjustment is made to
nevertheless include it. [Schedule 1, item 12, paragraph 355-115(2)(b) of the
ITAA 1997]
1.43 Rules apply to prevent any double counting of amounts
recognised at different times as notional deductions and total expenses.
[Schedule 1, item 12, subsection 355-115(3) of the ITAA 1997]
Example 1.3 Total expenses
On 1 July 2019, Ace Designs acquires an asset for $20,000 that it uses
exclusively in its R&D activities. The R&D entity claims an up-front
notional deduction of $20,000 in the 2019-20 income year
(section 355-205).
For its financial accounts, Ace Designs uses the straight line method to
work out the asset's depreciation records. The asset has a useful life of
four years. Ace Designs records an expense of $5,000 in each of the
2019-20 to 2022-23 income years for the asset (for simplicity, the
effect of a leap year is ignored in this example).
An adjustment is required when the entity's total expenses are
calculated for R&D purposes in the 2019-20 income year. $5,000 is
included as an accounting expense under paragraph 355-115(2)(a).
However, an adjustment is made to add a further $15,000 to the total
expenses, under paragraph 355-115(2)(b). This reflects the additional
amount of notional deductions that are claimed in the 2019-20 income
year.
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
No amount is included in Ace Designs' total expenses for R&D
purposes in the later income years in relation to the asset. In each of
these years, the $5,000 accounting expenses would initially satisfy
paragraph 355-115(2)(a). However, the amounts are disregarded
because a corresponding amount was included under paragraph (2)(b)
in the 2019-20 income year (applying paragraph (3)(a)).
Consequential amendments
1.44 A cross-reference to the expenditure threshold is amended to
reflect the increase of the threshold from $100 million to $150 million.
[Schedule 1, item 5, the heading to subsection 355-100(1) of the ITAA 1997]
1.45 A number of amendments are made to section 355-100 of the
ITAA 1997 to accommodate and explain the introduction of R&D
intensity premiums to the calculation of the non-refundable R&D tax
offset. [Schedule 1, items 8 and 10, Note 2 to subsection 355-100(1) and
subsection 355-100(2) of the ITAA 1997]
1.46 Similarly, subsection 355-100(3) is amended to reflect both the
increased expenditure threshold and the changes to subsection 355-100(1).
In turn, a consequential amendment is made to subsection 67-30(1).
[Schedule 1, items 2 and 3, subsection 67-30(1) of the ITAA 1997]
1.47 Consequential amendments are made to explain that the amount
of an R&D tax offset in excess of the $4 million refund cap is a
non-refundable tax offset. [Schedule 1, items 1 and 8, table item 35 in
subsection 63-10(1) and Note 1 to subsection 355-100(1) of the ITAA 1997]
Application provisions
1.48 The amendments commence on the first day of the quarter
following Royal Assent. [Section 2 of the Bill]
1.49 The amendments in Schedule 1 apply to income years starting
on or after 1 July 2019. [Schedule 1, item 17]
1.50 The amendments have a retrospective application for income
years starting on or after 1 July 2019 to ensure that they apply as soon as
possible to better target the Incentive to improve its effectiveness and
integrity and enhance its administrative framework.
1.51 Reforms to the R&D Tax Incentive were announced on 8 May
2018 to apply from 1 July 2018 as part of the 2018-19 Budget. An
Exposure Draft of the legislation implementing the 2018-19 Budget
reforms was released for public consultation in June 2018. Legislation to
give effect to the changes was introduced to Parliament in Treasury Laws
Amendment (Making Sure Multinationals Pay Their Fair Share Of Tax In
Australia And Other Measures) Bill 2018. However, this Bill lapsed with
16
Better targeting the Research and Development Tax Incentive
the proroguing of Parliament in April 2019. Affected taxpayers were
aware of the Government's intention to reform the Incentive and the
potential impact the Budget reforms would have on the scope of the
program from the date of the Budget announcement. The Government has
decided that the measures in this Bill generally apply from 1 July 2019
and to implement a simplified three tiered system for the intensity-based
R&D tax offset for large R&D entities.
17
Chapter 2
Enhancing the integrity of the Research
and Development Tax Incentive
Outline of chapter
2.1 Schedule 2 to the Bill enhances the integrity of the R&D Tax
Incentive by ensuring that R&D entities cannot obtain inappropriate tax
benefits and by clawing back the benefit of the Incentive to the extent an
entity has received another benefit in connection with an R&D activity.
Context of amendments
Recoupments
2.2 Where an R&D entity benefits from a government recoupment
(such as a grant or reimbursement) in relation to expenditure that is also
eligible for the R&D tax offset, a clawback applies to reverse the double
benefit that arises (Subdivision 355-G). In this context, only the 'incentive
component' of an R&D tax offset is intended to be clawed back.
2.3 The clawback takes the form of an additional tax on the
recoupment (and any other expenditure required as a condition of the
recoupment) at a rate of 10 per cent (sections 12B and 31 of the Income
Tax Rates Act 1986). The 10 per cent rate was initially selected as a
simplicity measure by making the assumption that the R&D entity
obtained the initial lower offset rate of 40 per cent (now 38.5 per cent)
rather than the higher rate of 45 per cent (now 43.5 per cent). The 10
per cent tax rate also assumes a fixed 30 per cent corporate tax rate for all
R&D entities.
Example 2.1 Recoupments
Cross Innovations receives a $1 million grant to undertake R&D
activities. In addition to the grant, Cross Innovations must spend an
additional $1 million of its own money as a condition of the grant.
Cross Innovations receives an offset of $870,000 (applying the
43.5 per cent offset rate to the $2 million expenditure). Cross
Innovations would have otherwise been entitled to a deduction worth
$550,000 at the 27.5 per cent corporate tax rate. Therefore, the
incentive component of the offset is the difference of $320,000.
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
In the same income year, the recoupment rules clawback only 10
per cent of the total $2 million spent under the terms of the grant,
which is $200,000. Cross Innovations keeps the remaining $120,000 of
the offset incentive. However, the grant alone is intended to constitute
sufficient incentive without the additional $120,000 from the R&D tax
incentive.
2.4 The recoupment rules also apply where an R&D entity receives
a recoupment for expenditure incurred by another entity to which it is
connected or affiliated (subsection 355-450(4)). In these situations, the
R&D entity receiving the recoupment is subject to the clawback tax even
though the other entity obtained the financial benefit of the R&D tax
offset.
Feedstock adjustments
2.5 Feedstock adjustments apply to recoup the benefit of the
Incentive to the extent it relates to goods, material or energy used to
produce marketable products sold or applied to the R&D entity's own use
(Subdivision 355-H).
2.6 The intended net outcome is that the Incentive is effectively
enjoyed on feedstock expenditure to the extent that it is not offset by
feedstock revenue. This is achieved by basing the adjustment on the lesser
of feedstock expenditure and feedstock revenue.
2.7 Where feedstock revenue exceeds the feedstock output's related
feedstock expenditure, the feedstock adjustment will be based on the
feedstock expenditure -- because the effective net cost of the feedstock
inputs and energy was nil.
2.8 Where feedstock revenue is less than the feedstock output's
related feedstock expenditure, the feedstock adjustment will be based on
the feedstock revenue -- because the effective net cost of the feedstock
inputs and energy was reduced by that amount.
2.9 The adjustment is implemented by including one third of the
lesser of feedstock expenditure or feedstock revenue in the R&D entity's
assessable income (subsection 355-465(2)). As with the recoupments in
Subdivision 355-G, the one third formula is intended to recoup 10
percentage points of the Incentive (based on a standard 30 per cent
corporate tax rate).
2.10 In contrast to the recoupment provisions, feedstock adjustments
are incorporated into the income tax equation in section 4-10 and do not
create a new tax.
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Enhancing the integrity of the Research and Development Tax Incentive
Example 2.2 Feedstock adjustments
Wayland Enterprises, a large R&D entity, spends $100,000 on the
development of a new product, producing one tangible product, which
it then sells for $110,000. Wayland Enterprises is entitled to a $38,500
offset (with an in incentive component of $8,500).
$33,333 is included in Wayland Enterprises' assessable income (one
third of the feedstock expenditure). After applying the corporate tax
rate to the amount included in assessable income, the feedstock
adjustment would claw back 10 per cent: $10,000, which is more than
the incentive component.
However, if Wayland Enterprises was a small R&D entity in the same
position, it would claim an offset of $43,500 (with an incentive
component of $16,000).
The $33,333 would be included in assessable income and taxed at the
27.5 per cent corporate tax rate. The feedstock adjustment would claw
1
back just 9 per cent of the offset: $9,166.57.
6
2.11 The feedstock rules also apply where an R&D entity receives
feedstock revenue in relation to an R&D tax offset obtained by another
entity to which it is connected or affiliated (section 355-75). However, in
these situations, the R&D entity originally entitled to the R&D tax offset
is subject to the feedstock adjustment rather than the entity receiving the
feedstock revenue. This represents a further inconsistency between the tax
treatment of feedstock revenue and recoupments.
Balancing adjustments
2.12 Balancing adjustment events occur when an entity stops holding
a depreciating asset, for example when the entity sells the asset
(section 40-295). Balancing adjustment events require an entity to
compare the economic value of the asset (its termination value
(section 40-300)) with its written-down tax value (its adjusted value
(section 40-85)).
2.13 If an asset's termination value exceeds its adjusted value, the
difference (the balancing adjustment amount) is included in the entity's
assessable income in the income year in which the balancing adjustment
event occurs. If an asset's adjusted value exceeds its termination value,
the entity is allowed a deduction for the difference. As such, the balancing
adjustment ensures an entity's overall tax position reflects the true decline
in value of the asset (section 40-285).
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
2.14 R&D entities can obtain an R&D tax offset for the decline in
value of depreciating assets held for R&D purposes (an R&D asset)
(section 355-305). This necessitates additional consequences arising from
a balancing adjustment for the R&D asset:
• for an R&D asset held only for R&D purposes where the
balancing adjustment amount is included in the R&D entity's
assessable income - the amount is generally increased by one
third (subsection 355-315(3));
• for an R&D asset held only for R&D purposes where the
balancing adjustment amount is allowed as a deduction - the
deduction is included in the R&D entity's R&D tax offset
calculation (subsection 355-315(2));
• for an R&D asset held partially for R&D purposes where the
balancing adjustment amount is included in the R&D entity's
assessable income - the part of the amount attributable to the
asset's R&D use (the R&D component) is generally
increased by one third (subsection 40-292(4)); and
• for an R&D asset held partially for R&D purposes where the
balancing adjustment amount is allowed as a deduction - the
R&D component of the amount is generally increased by one
third or (for small R&D entities) or one half (subsection
40-292(3)).
2.15 Similar rules apply to R&D assets held by R&D partnerships
(sections 40-293 and 355-525).
2.16 Transitional rules apply in a similar way to R&D assets acquired
prior to the introduction of the Incentive in 2011. These transitional rules
further increase certain balancing adjustment amounts to reflect old 1.25
rate deductions available for R&D assets under the pre-2011 law
(subsections 40-292(3), 40-293(3), 355-20(4) and 255-25(4) of the Income
Tax (Transitional Provisions) Act 1997 (the Transitional Provisions Act)).
These transitional rules do not apply to deductible balancing adjustment
amounts in respect of R&D assets used only for R&D purposes.
2.17 As with the feedstock and recoupment adjustment rules, these
R&D balancing adjustment rules rely on rough approximations of the
incentive component of an R&D entity's R&D tax offsets.
Summary of new law
2.18 Schedule 2 to the Bill improves the integrity of the Incentive by:
• extending the general anti-avoidance rules in the tax law to
R&D tax offsets directly;
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Enhancing the integrity of the Research and Development Tax Incentive
• making the rate at which the offset is recouped more accurate
in situations where the offset would otherwise result in an
additional or double benefit; and
• making that rate at which deductible balancing adjustment
amounts incorporate the Incentive more accurate.
Comparison of key features of new law and current law
New law Current law
Schemes to obtain an R&D tax benefit
The Commissioner may also deny a The Commissioner may deny a tax
tax benefit in the form of an amount benefit in the form of a deduction or
of a refundable or non-refundable notional deduction that an R&D
R&D tax offset that an R&D entity entity seeks to obtain from a tax
seeks to obtain from a tax avoidance avoidance scheme.
scheme.
The uniform clawback rule
Recoupment amounts and feedstock Recoupment amounts are subject to
adjustments give rise to an amount a standalone tax of 10 per cent.
of assessable income equal to the One third of feedstock adjustments
grossed-up value of the incentive are included in an R&D entity's
component of associated amounts of assessable income.
R&D tax offset.
An amount is included in the In cases involving related entities,
assessable income of the R&D entity the entity receiving a recoupment is
that received or is entitled to the subject to recoupment tax.
R&D tax offset in relation to a In cases involving related entities,
recoupment amount or feedstock the R&D entity entitled to the R&D
revenue received by a related entity. tax offset is subject to a feedstock
adjustment if the related entity
receives feedstock revenue.
Balancing adjustments for R&D assets
The R&D entity's assessable income For an R&D asset held only for
is increased by an amount equal to R&D purposes where the balancing
the grossed-up value of the incentive adjustment amount is included in the
component of the associated R&D entity's assessable income -
amounts of R&D tax offset. the amount is generally increased by
one third.
For an R&D asset held partially for
R&D purposes where the balancing
adjustment amount is included in the
R&D entity's assessable income -
the R&D component of the amount
is generally increased by one third.
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
New law Current law
The R&D entity is entitled to a For an R&D asset held only for
deduction equal to the grossed-up R&D purposes where the balancing
value of the incentive component of adjustment amount is allowed as a
the associated amounts of R&D tax deduction - the deduction is
offset that would have been obtained included in the R&D entity's R&D
if the R&D component of the tax offset calculation.
balancing adjustment amount was For an R&D asset held partially for
included in the calculation of the R&D purposes where the balancing
offset. adjustment amount is allowed as a
deduction - the R&D component of
the amount is increased by one third
or (for small R&D entities) or one
half
Similar amended rules apply to Similar rules apply to balancing
balancing adjustments for R&D adjustments for R&D assets held by
assets held by R&D partnerships. R&D partnerships.
The transitional rules are amended in Transitional rules apply to R&D
line with the primary amendments assets acquired before the
but continue to apply to R&D assets introduction of the Incentive in 2011.
acquired before the introduction of
the Incentive in 2011.
Detailed explanation of new law
Schemes to obtain an R&D tax benefit
2.19 Part 1 of Schedule 2 to the Bill explicitly extends the concept of
tax benefits in the general anti-avoidance rule in Part IVA of the
ITAA 1936 to include the R&D tax offset. These amendments ensure that
the Commissioner can apply Part IVA to prevent R&D entities from being
able to obtain tax benefits by entering into artificial or contrived
arrangements to access a non-refundable or a refundable R&D tax offset.
[Schedule 2, items 2 to 10, paragraphs 177C(1)(bd) and (h), 177C(2)(f), 177C(3)(cc)
and (i), 177CB(1)(f), 177F(1)(f), 177F(3)(g) and subsection 177C(3) of the ITAA 1936]
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Enhancing the integrity of the Research and Development Tax Incentive
2.20 Part IVA of the ITAA 1936 applies in situations where a scheme
or arrangement is entered into in order to obtain a tax benefit. These rules
allow the Commissioner to cancel the relevant tax benefit where the
conditions under Part IVA are satisfied. For example, this can include
situations where an R&D entity enters into an arrangement with a
dominant purpose of securing a tax benefit that is an R&D tax offset. It
can also include situations where an entity enters into an arrangement with
a dominant purpose to enable it to obtain a refundable R&D tax offset,
where it would have, or might reasonably be expected to have, obtained a
non-refundable R&D tax offset if the scheme had not been entered into or
carried out.
The uniform clawback rule
2.21 Part 2 of Schedule 2 to the Bill remakes and consolidates
Subdivisions 355-G and 355-H of the ITAA 1997 (about the clawback of
R&D recoupments and feedstock adjustments respectively) into a new
Subdivision 355-G. This Subdivision also introduces a new uniform
clawback rule that applies for recoupments, feedstock adjustments and
balancing adjustment amounts that are included in an R&D entity's
assessable income. The amendments ensure that an R&D entity must
disgorge the entire benefit of an R&D tax offset to the extent it (or a
connected entity or an affiliate entity where appropriate) receives a
recoupment amount, feedstock adjustment or assessable balancing
adjustment because of the offset. [Schedule 2, item 29, section 355-430 of the
ITAA 1997]
2.22 Current Subdivisions 355-G and 355-H, and the various
balancing adjustment rules, only partially reverse the benefit of an R&D
tax offset in some circumstances. In light of the amendments discussed in
Chapter 1, the current clawback rules would produce more anomalous
outcomes if they are not amended. The amendments ensure the full benefit
of the R&D tax offset is reversed, to remove the unintended benefits that
arise in such situations.
Clawback amounts
Recoupment amounts and feedstock adjustment clawback amounts
2.23 Current Subdivision 355-G is remade into a single section and
reference to the payment of extra income tax (a recoupment tax) is
removed. Instead, the remade provision identifies an amount (a clawback
amount) that represents the amount of notional deductions an R&D entity
received or is entitled to receive in relation to a recoupment. [Schedule 2,
item 29, section 355-440 of the ITAA 1997]
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
2.24 Current Subdivision 355-H is remade into a single section and
the reference to the inclusion of an amount in assessable income is
removed. Instead, the remade provision identifies an amount (a clawback
amount) that represents the amount of notional deductions an R&D entity
received or is entitled to receive in relation to a feedstock adjustment. The
clawback amount is the lesser of the feedstock revenue received or the
notional deductions attributable to the feedstock output. [Schedule 2, item 29,
section 355-445 of the ITAA 1997]
Example 2.3 Clawback amounts
In Example 1.2, Contrast Industries had the following amounts in the
2019-20 income year (the offset year):
• aggregated turnover in excess of $50 million;
• expenditure of $1 billion;
• notional deductions of $160 million; and
• a non-refundable R&D tax offset of $61.55 million.
Further to this example, in the 2021-22 income year, Contrast
Industries sells a tangible product developed during its 2019-20
income year R&D activities. The tangible product is sold for $20
million but cost $25 million to develop. All of the costs were included
in Contrast Industries' notional deductions for the 2019-20 income
year.
The clawback amount is the lesser of the market value of the tangible
product on sale (feedstock revenue) and the tangible product's cost.
Here, Contrast Industries has a clawback amount of $20 million.
Balancing adjustment clawback amounts
2.25 There are four clawback amounts that relate to assessable
balancing adjustments. The primary clawback amount applies for R&D
assets held only for R&D purposes. The clawback amount is the balancing
adjustment amount capped at the level of the asset's total decline in value
(its tax cost less its adjusted value). The cap ensures the clawback does
not apply to the extent an R&D asset's has appreciated in value while
held. [Schedule 2, item 29, section 355-446 of the ITAA 1997]
2.26 If the R&D asset was only held partially for R&D purposes, a
different clawback amount applies. This clawback amount is calculated in
a similar way to the primary clawback amount but it is reduced in
proportion to its non-R&D use. [Schedule 2, item 29, section 355-447 of the
ITAA 1997]
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Enhancing the integrity of the Research and Development Tax Incentive
2.27 Different clawback amounts arise if the R&D asset is held by an
R&D partnership. These two clawback amounts reflect the first two
balancing adjustment clawback amounts: one for R&D assets used only
for R&D purposes and one for assets held only partially for R&D
purposes. These rules are necessary to ensure the clawback amount arises
for the individual R&D entities that are partners in the R&D partnership.
[Schedule 2, item 29, sections 355-448 and 355-449 of the ITAA 1997]
2.28 The four clawback rules outlined above apply in a modified way
where the R&D asset was acquired before the introduction of the
Incentive in 2011. [Schedule 2, items 41 to 45, 48 to 50, 53 and 54,
subsections 40-292(3) and (3A), 40-293(3) and (3A), 355-320(4) and (4A),
and 355-325(4) to (4D), and Note 1 to subsections 355-320(1) and 355-325(1) of the
Transitional Provisions Act]
2.29 The clawback amount rules replace existing rules that estimated
the incentive component of the R&D tax offset that need to be clawed
back. [Schedule 2, items 17, 20, 28 and 32, subsections 40-292 (3) to (5), 40-293(3),
355-315(3), and 355-525(3) to (7) of the ITAA 1997]
Changes from the current law
2.30 The clawback amount is relevant for working out the amount
that must be included in an R&D entity's assessable income to disgorge
the benefit of an R&D tax offset. The clawback amount reflects the
amount of R&D expenditure (notional deductions) tainted by the
operation of the recoupment, feedstock or R&D balancing adjustment
rules. The amendments calculate the amount of R&D tax offset tainted by
the tainted expenditure. The incentive component of the tainted R&D tax
offset, in turn, is the benefit to be clawed back.
2.31 The clawback amount picks up the amount worked out under
each of Subdivisions 355-G and 355-H, and the balancing adjustment
rules, in the current law immediately before adjustments are made to bring
it to account: applying tax to it in the case of recoupments and including a
third of the amount in assessable income in the case of feedstock and
balancing adjustments. It is primarily these adjustments in the current law
that are producing inappropriate outcomes and are subject to the
amendments.
2.32 Except as outlined in this Chapter, the remaking of
Subdivisions 355-G and 355-H, and the R&D balancing adjustment rules,
is not intended to alter the way recoupment amounts, feedstock
adjustments or assessable balancing adjustments (a clawback amount in
these amendments) are calculated. For further information on the
operation of these provisions, refer to the Explanatory Memorandum to
the Tax Laws Amendment (Research and Development) Bill 2011, and
existing guidance materials and rulings issued by the Commissioner.
2.33 Table 2.1 outlines the provisions of the new law as amended that
correspond with provisions of the current law.
27
Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
Table 2.1 Remaking the clawback rules
Clawback amount Current provisions New provisions
Recoupment amount Subdivision 355-G Section 355-440
Feedstock adjustments Subdivision 355-H Section 355-445
Balancing adjustment - asset used
Subsection 355-315(3) Section 355-446
only for R&D
Balancing adjustment - asset used
Subsection 40-292(4) Section 355-447
partially for R&D
Balancing adjustment - partnership
Subsection 355-525(3) Section 355-448
asset used only for R&D
Balancing adjustment - partnership
Paragraph 40-293(3)(b) Section 355-449
asset used partially for R&D
2.34 For balancing adjustments, sections 40-292, 40-293, 355-315
and 355-525 (and section 40-285) continue to operate where appropriate
to clawback the deduction component of the R&D tax offset (i.e. the
amount of the offset that reflects the R&D entity's corporate tax rate).
Similarly, feedstock revenue and government grants are generally
assessable as ordinary income (section 6-5). The new provisions clawback
the incentive component of the R&D tax offset.
The taxing point
2.35 Consistent with the existing law, the uniform clawback rule will
include an amount in assessable income in the year the clawback amount
arises (the present year). The underlying offset entitlement, whether in the
same year, one or more earlier years or one or more later years (each an
offset year) is unchanged. [Schedule 2, item 29, section 355-435 of the ITAA 1997]
2.36 The entity receiving a recoupment or feedstock revenue could be
the R&D entity entitled to the R&D tax offset or an entity affiliated with
or connected to the R&D entity. [Schedule 2, item 29, subsections 355-440(5)
and 355-445(5) of the ITAA 1997]
2.37 The amendments unify the taxing point in cases involving
related entities: where one entity has the R&D tax offset entitlement and
the other entity receives the recoupment or feedstock revenue. The R&D
entity that has received or is entitled to receive the R&D tax offset is the
entity with the clawback amount and must include an amount in its
assessable income. [Schedule 2, item 29, section 355-435 and
subsections 355-440(1), (2) and (5), and 355-445(5) of the ITAA 1997]
Example 2.4 Related entities and clawbacks
It would not change the outcome in Example 2.3 if, instead of Contrast
Industries selling the tangible product itself, the tangible product was
sold by a related entity. Contrast Industries would be subject to the
clawback amount.
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Enhancing the integrity of the Research and Development Tax Incentive
2.38 For R&D assets of an R&D partnership that are partially used
for R&D purposes, the clawback rule now includes an amount in the
partner's assessable income rather than the partnership's assessable
income. This aligns the taxing point with the taxing point for R&D assets
held by an R&D partnership that are used wholly for R&D purposes.
[Schedule 2, item 29, section 355-449 of the ITAA 1997]
The amount included in assessable income
2.39 When the clawback applies, the R&D entity entitled to the R&D
tax offset includes an amount in assessable income in relation to each
offset year in which it claimed an offset related to the clawback amount.
[Schedule 2, item 29, section 355-450 of the ITAA 1997]
2.40 The amount included in assessable income is worked out as
follows:
𝑆𝑡𝑎𝑟𝑡𝑖𝑛𝑔 𝑜𝑓𝑓� 𝑒𝑡 − 𝐴𝑑𝑗𝑢� 𝑡𝑒𝑑 𝑜𝑓𝑓� 𝑒𝑡 − 𝐷𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑎𝑚𝑜𝑢𝑛𝑡
𝑅&𝐷 𝑒𝑛𝑡𝑖𝑡𝑦 ′ � 𝑐𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑝𝑟𝑒� 𝑒𝑛𝑡 𝑦𝑒𝑎𝑟
2.41 Each of the components of this formula is explained below.
Calculating the offset portion subject to the clawback
2.42 The first step in applying the formula is to calculate the portion
of the R&D tax offset the R&D entity received that relates to the
clawback amount. If the R&D entity received the R&D tax offset in
multiple offset years in relation to the clawback amount that arises in the
present year, the formula must be applied in relation to each offset year.
2.43 The primary way of working out the portion of the offset to be
clawed back in an offset year is to compare the actual amount of the R&D
tax offset in that year (the starting offset) with the amount of the offset
(the adjusted offset) the R&D entity would have received if its notional
deductions were reduced by the portion of the clawback amount that
relates to the offset year. [Schedule 2, item 29, subsection 355-450(1) (definitions of
'adjusted offset' and 'starting offset') of the ITAA 1997]
2.44 This targets the clawback to the highest tiers of the R&D entity's
offset entitlement (i.e. those received for the highest intensity expenditure,
the last dollars the entity spent) for an offset year. If an R&D entity had
notional deductions in excess of the $150 million expenditure threshold,
the excess deductions would be reduced first, limiting the difference
between the starting and adjusted offset. This, when combined with the
operation of the deduction amount, is equivalent to the outcome achieved
under table items 2 and 3 in subsection 355-720(2) in the current law.
Example 2.5 The starting offset and the adjusted offset
Further to Example 2.3, the portion of Contrast Industries' 2019-20
R&D tax offset that is subject to the clawback is worked out by
subtracting the entity's adjusted offset from its starting offset.
29
Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
Contrast Industries has a starting offset of $61.55 million, the amount
of the offset it received in the 2019-20 income year.
Contrast Industries has an adjusted offset calculated as if its notional
deductions for the 2019-20 income year were reduced from $160
million to $140 million by the value of the clawback amount. The
entire clawback amount is included in the reduction because the entire
amount relates to the 2019-20 income year.
The adjusted offset is calculated as follows:
Tier Intensity R&D Notional Offset
range premium deductions applied amount
Tier 1 0-4% 4.5% $40m $13.8m
Tier 2 4-9% 8.5% $50m $19.25
Tier 3 >9% 12.5% $50m $21.25
Excess NA Nil Nil Nil
Totals: $140m $54.3m
The adjusted offset amount reflects that $10 million has been removed
from the excess tier and $10 million has been removed from tier 3, the
highest tier Contrast Industries reached on its level of R&D intensity.
The difference between the two offset amounts is $7.25 million.
Recursive calculations for multiple clawback amounts
2.45 The situation is more complex where an R&D entity's offsets in
a particular offset year are clawed back multiple times because the entity
receives multiple clawback amounts in relation to it or also receives a
catch-up amount (see paragraph 2.59). In these circumstances, the
clawback rule works in a recursive manner.
2.46 In recursive applications of the rule, the R&D entity must
compare the offset amount that could have been claimed under the last
counterfactual calculated and the amount that could have been claimed
under a new counterfactual. In calculating the new counterfactual, the
R&D entity must incorporate all previous adjustments to the notional
deduction amount and make a further reduction for the new clawback
amount. [Schedule 2, item 29, subsection 355-450(2) of the ITAA 1997]
Example 2.6 Recursive clawback
Flying Fox Innovations has an R&D tax offset entitlement based on
$100 million of notional deductions. The entity receives two
recoupment amounts: one of $10 million and one of $20 million.
30
Enhancing the integrity of the Research and Development Tax Incentive
For the first recoupment, the clawback is calculated by reference to the
difference between the starting offset calculated on $100 million of
notional deductions and the adjusted offset calculated on $90 million.
For the second recoupment, the clawback is calculated by reference to
the difference between the starting offset calculated on $90 million and
the adjusted offset calculated on $70 million.
Allowing the benefit of the deduction
2.47 Regardless of whether the primary or recursive rule is applied in
calculating the difference, once the difference is identified, it is not
appropriate to bring the entire difference to account as tax. Only the
incentive component (or premium) is brought to account. Therefore, the
second step of the above formula requires that the difference between the
starting offset and the adjusted offset be reduced by the product of the
portion of the clawback amount that relates to the offset year and the
R&D entity's corporate tax rate in the offset year. This allows the R&D
entity to retain the benefit of the R&D tax offset for the clawback amount
to the extent it replaced the benefit of a deduction for the same
expenditure. [Schedule 2, item 29, subsection 355-450(1) (definition of 'deduction
amount') of the ITAA 1997]
Example 2.7 The deduction amount
Further to Example 2.5, Contrast Industries has a deduction amount
equal to its clawback amount ($20 million) multiplied by its corporate
tax rate in the offset year (30 per cent): $6 million. This is because
while the expenditure is no longer eligible for the R&DTI as a notional
deduction, the expenditure would have been an eligible deduction.
The $7.25 million figure reached in Example 2.5 is reduced by the
$6 million deduction amount to complete the numerator of the formula
at paragraph 2.40. The resulting $1.25 million represents the additional
amount of tax Contrast Industries must pay to reverse the incentive
component of the R&D tax offset associated with the development of
the tangible product.
Bringing the amount to account
2.48 The R&D entity must bring the amount to account as assessable
income in the year in which the entity received the clawback amount. The
amount calculated up to this point represents the full dollar-value of the
incentive component of the R&D tax offset the R&D entity obtained in
connection with the clawback amount. The amount of tax the R&D entity
is required to pay equals this amount. As such, this amount is grossed-up
by dividing it by the R&D entity's corporate tax rate for the present year
to ensure its value is maintained when taxed.
Example 2.8 The denominator
Further to Example 2.7, Contrast Industries must divide the
$1.25 million by its current corporate tax rate (30 per cent).
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
The resulting $4.167 million is included in the assessable income of
Contrast Industries in the 2021-22 income year. Disregarding other
assessable income and deductions, this will increase the income tax
liability of Contrast Industries by the appropriate $1.25 million once
the corporate tax rate applies to the entity's taxable income.
2.49 Bringing the amount to account as assessable income (rather
than through a standalone tax) allows R&D entities to apply deductions
from the current year and carried-forward losses against the clawback.
Loss-making R&D entities that only obtained a non-refundable R&D tax
offset in the offset year can apply the carried-forward offset against the
amount included in assessable income. This ensures the clawback rule
recovers the correct amount but does not have an unintended negative
cash flow impact on R&D entities.
Catch-up rule for R&D balancing adjustments
2.50 The amendments introduce a new catch-up rule for R&D assets.
This rule provides an additional deduction to R&D entities when a
deductible balancing adjustment amount arises for an R&D asset.
[Schedule 2, item 29, sections 355-455 and 355-460 of the ITAA 1997]
2.51 The catch-up rule mirrors the uniform clawback rule but
operates in reverse, providing a deduction in lieu of an amount of R&D
tax offset forgone rather than including an amount in assessable income.
[Schedule 2, item 29, section 355-475 of the ITAA 1997]
2.52 As with the clawback amounts for balancing adjustments (see
paragraphs 2.25 to 2.28), there are four different catch-up amounts to
cover R&D assets either wholly or partially used for R&D, assets held by
R&D entities and those held by R&D partnerships. The catch-up amounts
reflect the amount an R&D entity can ordinarily deduct for the balancing
adjustment event. [Schedule 2, item 29, sections 355-465, 355-466, 355-467
and 355-468 of the ITAA 1997]
2.53 These catch-up amounts are calculated in a modified way where
the R&D asset was acquired before the introduction of the Incentive in
2011. [Schedule 2, items 41 to 44, 46, 47, 49, 51, 52 and 54, subsections 40-292(3)
and (3A), 40-293(3) and (3A), 355-320(3) and (4A), and 355-325(3) and (4A) of the
Transitional Provisions Act]
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Enhancing the integrity of the Research and Development Tax Incentive
2.54 The catch-up amount rules replace provisions of the current law
that either sought to estimate the value of the R&D tax offset forgone or
replace it with a new R&D tax offset entitlement, neither option giving
rise to an accurate catch-up. [Schedule 2, items 18, 20 to 26, 30 and 31,
sections 355-105 and 355-300, subsections 40-292(3) and (5), and 40-293(3),
paragraphs 355-100(1)(c) and (f), the heading to Subdivision 355-E, the headings to
subsections 355-315(2) and 355-525(2), the notes to subsections 355-315(2)
and 355-525(2) of the ITAA 1997]
2.55 It remains a condition for accessing the incentive component of
the balancing adjustment (now the deduction for a catch-up amount) that
the R&D entity be registered for R&D activities in the income year in
which the balancing adjustment event occurs. However, for simplicity it is
no longer a requirement that the R&D entity have $20,000 of notional
deductions in that income year.
2.56 For R&D assets of an R&D partnership that are partially used
for R&D purposes, the catch-up rule now makes each partner entitled to a
deduction rather than the partnership. This mirrors the amendment
outlined in paragraph 2.38. [Schedule 2, item 29, section 355-468 of the
ITAA 1997]
2.57 Table 2.2 outlines the provisions of the new law as amended that
correspond with provisions of the current law.
Table 2.2 Remaking of catch-up amount rules
Catch-up amount Current provisions New provisions
Balancing adjustment - asset used
Subsection 355-315(2) Section 355-465
only for R&D
Balancing adjustment - asset used
Subsection 40-292(3) Section 355-466
partially for R&D
Balancing adjustment - partnership
Subsection 355-525(2) Section 355-467
asset used only for R&D
Balancing adjustment - partnership
Paragraph 40-293(3)(a) Section 355-468
asset used partially for R&D
2.58 Sections 40-292, 40-293, 355-315 and 355-525 (and
section 40-285) continue to operate where appropriate to provide a
catch-up for the deduction component of the R&D tax offset (i.e. the
amount of the offset that reflects the R&D entity's corporate tax rate). The
new provisions provide an additional catch-up for the incentive
component of the R&D tax offset.
2.59 The amount allowed as a deduction for a catch-up amount for an
offset year is worked out as follows:
𝐴𝑑𝑗𝑢� 𝑡𝑒𝑑 𝑜𝑓𝑓� 𝑒𝑡 − 𝑆𝑡𝑎𝑟𝑡𝑖𝑛𝑔 𝑜𝑓𝑓� 𝑒𝑡 − 𝐷𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑎𝑚𝑜𝑢𝑛𝑡
𝑅&𝐷 𝑒𝑛𝑡𝑖𝑡𝑦 ′ � 𝑐𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑝𝑟𝑒� 𝑒𝑛𝑡 𝑦𝑒𝑎𝑟
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
2.60 This formula mirrors the formula discussed in paragraphs 2.40
to 2.48 with two important distinctions. Firstly, the initial operation
requires the starting offset to be subtracted from the adjusted offset (rather
than the reverse). Secondly, the adjusted offset is defined as the R&D tax
offset the R&D entity would have received if its notional deductions for
the offset year included the portion of the catch-up amount that is
attributable to the offset year. [Schedule 2, item 29, section 355-475 of the
ITAA 1997]
Example 2.9 Deductible balancing adjustment amounts
Spark Transformations is an R&D entity with an annual turnover of
between $20 million and $25 million in the 2018-19 to 2020-21
income years. Spark Transformations is subject to the corporate tax
rate for a base rate entity.
On 18 April 2019, Spark Transformations acquires a depreciating asset
for $80,000. It has an effective life of five years. Spark
Transformations used the asset entirely for R&D purposes.
Spark Transformations sells the asset on 1 July 2021 for $34,800.
Decline in value notional deductions
Spark Transformations uses the prime cost (straight line) method in
section 40-75 to work out the asset's decline in value as follows:
Decline in value
Days asset Decline in Adjusted
Income Year
used Value Value
2018-19 73 $3,200 $76,800
2019-20 *365 $16,000 $60,800
2020-21 365 $16,000 $44,800
* For simplicity the calculations in this example ignore that 2020 is a leap year
Spark Transformation is entitled to notional deductions for the asset's
decline in value in each income year.
The R&D tax offset
For the 2018-19 income year, Spark Transformations is entitled to an
R&D tax offset at the current 38.5 per cent rate. In relation to the
depreciating asset, Spark Transformations is entitled to an R&D tax
offset of $1,232. Spark Transformations has total notional deductions
in excess of $20,000 (so subsection 355-100(2) does not apply) but it is
not necessary to quantify them.
For the 2019-20 and 2020-21 income years, it is necessary to consider
the total R&D tax offset entitlement of Spark Transformations.
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Enhancing the integrity of the Research and Development Tax Incentive
In the 2019-20 income year, Spark Transformations has notional
deductions of $300,000 (inclusive of the decline in value notional
deductions) and total expenses of $7.8 million. Therefore, Spark
Transformations has an R&D intensity of 3.85 per cent. As it is subject
to the corporate tax rate of 27.5 per cent in this income year, its R&D
tax offset entitlement is worked out as follows:
2019-20 starting offset
Tier Intensity R&D Notional Offset
range premium deductions amount
applied
Tier 1 0-4% 4.5% $300,000 $96,000
Tier 2 4-9% 8.5% Nil Nil
Tier 3 >9% 12.5% Nil Nil
Excess NA Nil Nil Nil
Totals: $300,000 $96,000
In the 2020-21 income year, Spark Transformations has notional
deductions of $350,000 (inclusive of the decline in value notional
deductions) and total expenses of $7.35 million. Therefore, Spark
Transformations has an R&D intensity of 4.76 per cent. As it is subject
to the corporate tax rate of 26 per cent in this income year, its R&D tax
offset entitlement is worked out as follows:
2020-21 starting offset
Tier Intensity R&D Notional Offset
range premium deductions amount
applied
Tier 1 0-4% 4.5% $294,000 $89,670
Tier 2 4-9% 8.5% $56,000 $19,320
Tier 3 >9% 12.5% Nil Nil
Excess NA Nil Nil Nil
Totals: $350,000 $108,990
The catch-up amount portions
When the asset is sold, there is a balancing adjustment event. Because
the asset's adjusted value ($44,800) exceeds its termination value
($34,800), Spark Transformations is entitled to a deductible balancing
adjustment amount of $10,000. This amount is allowed as a deduction
but is not a notional deduction and does not contribute towards the
entity's R&D tax offset entitlement.
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
This gives rise to a catch-up amount of $10,000 that relates to the three
income years (each an offset year) in which Spark Transformations
claimed the R&D tax offset in relation to the asset's decline in value. It
is necessary to work out the portion of the $10,000 catch-up amount
that relates to each offset year. To do this, it is necessary to work out
the decline in value recorded in each offset year as a proportion of the
total decline in value of the asset ($35,200):
𝐷𝑒𝑐𝑙𝑖𝑛𝑒 𝑖𝑛 𝑣𝑎𝑙𝑢𝑒
𝐶𝑎𝑡𝑐ℎ𝑢𝑝 𝑝𝑜𝑟𝑡𝑖𝑜𝑛 = 𝐶𝑎𝑡𝑐ℎ𝑢𝑝 𝑎𝑚𝑜𝑢𝑛𝑡 ×
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑐𝑙𝑖𝑛𝑒 𝑖𝑛 𝑣𝑎𝑙𝑢𝑒
Spark Transformations has the following catch-up portions in the
2021-22 income year:
• $909.09 for the 2018-19 income year; and
• $4,545.45 for each of the 2019-20 and 2020-21 income years.
The adjusted offsets
The adjusted offset for each offset year is calculated by adding the
catch-up portion to the R&D entity's notional deductions. This also
impacts the calculations for total expenditure and R&D intensity.
It is not strictly necessary to calculate the adjusted offset for the
2018-19 income year because the flat 38.5 per cent R&D tax offset rate
applies.
The adjusted offset for the 2019-20 income year is calculated as
follows:
2019-20 adjusted offset
Tier Intensity R&D Notional Offset
range premium deductions amount
applied
Tier 1 0-4% 4.5% $304,545.45 $97,454.55
Tier 2 4-9% 8.5% Nil Nil
Tier 3 >9% 12.5% Nil Nil
Excess NA Nil Nil Nil
Totals: $304,545.45 $97,454.55
The adjusted offset for the 2020-21 income year is calculated as
follows:
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Enhancing the integrity of the Research and Development Tax Incentive
2020-21 adjusted offset
Tier Intensity R&D Notional Offset
range premium deductions amount
applied
Tier 1 0-4% 4.5% $294,181.82 $89,725.45
Tier 2 4-9% 8.5% $60,363.64 $20,825.45
Tier 3 >9% 12.5% Nil Nil
Excess Nil Nil Nil Nil
Totals: $354,545.45 $110,550.91
Note that the R&D intensity for the adjusted offset calculation is
3.9 per cent in the 2019-20 income year and 4.82 per cent in the
2020-21 income year. This incorporates the increase in notional
deductions being included in total expenses.
The offset differential
The difference between the starting offset and the adjusted offset for
the 2018-19 income year can be simply calculated as the catch-up
portion multiplied by the flat R&D tax offset rate of 38.5 per cent.
For the 2019-20 and 2020-21 income years, the difference is derived
by comparing the outcomes of the tables above.
Spark Transformations has the following offset differentials:
• $350 ($909.09 multiplied by 38.5 per cent) in the 2018-19 income
year;
• $1,454.55 ($97,454.55 less $96,000) in the 2019-20 income year;
and
• $1,560.91 ($110,550.91 less $108,990) in the 2020-21 income year.
The deduction amount
The deduction amount is the catch-up portion for an offset year
multiplied by the corporate tax rate that applied in that year (27.5
per cent for the 2019-20 income year and 26 per cent for the 2020-21
income year). Spark Transformations has the following deduction
amounts totalling $2,681.82:
• $250 for the 2018-19 income year;
• $1,250 for the 2019-20 income year; and
• $1,181.82 for the 2020-21 income year.
These amounts are not available as deductions but are included in the
'deduction amount' in the catch-up rule formula (see paragraph 2.59).
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
Gross-up
The total of the differences between the adjusted offsets and the
corresponding starting offsets is reduced by the deduction amounts and
then grossed-up by the entity's current corporate tax rate (which in the
2021-22 income year, it is 25 per cent). Spark Transformations is
entitled to a deduction for the result of the following equation:
($350 + $1,454.55 + $1,560.91) − ($250 + $1,250 + $1,181.82)
25%
= $2,734.56
The deduction will reduce the income tax liability of Spark
Transformations by $683.64 once the current corporate tax rate is
applied. This puts the entity in the position it would be in had the
decline in value of the asset for tax purposes kept pace with the actual
decline in value of the asset.
This reduction of the tax liability reflects that Spark Transformations is
separately entitled to a $10,000 deduction for the balancing adjustment
event under subsection 355-315(2). This balancing adjustment amount
will result in Spark Transformations reducing its income tax liability
by $2,500 in the 2021-22 income year.
Consequential amendments
2.61 Definitions of 'non-refundable R&D tax offset' and 'refundable
R&D tax offset' linked to Division 355 of the ITAA 1997 are inserted into
the dictionary in Part IVA of the ITAA 1936. [Schedule 2, item 1,
subsection 177A(1) (definition of 'non-refundable R&D tax offset' and 'refundable
R&D tax offset') of the ITAA 1936]
2.62 Consequential amendments are made to the remaking of the
recoupment, feedstock and balancing adjustment provisions, and the
introduction of the uniform clawback rule. These includes removing
redundant provisions associated with the recoupment tax and repealing
section 355-720, which dealt with the interaction between the expenditure
threshold and the old recoupment, feedstock and R&D balancing
adjustment rules. These functions are now consolidated in the new
clawback rule. [Schedule 2, items 11 to 14, 33 to 36, 38 to 40, and 55, sections 4-25,
10-5, 355-530 and 355-720, table item 4A in subsection 9-5(1), table item 10 in
section 20-5, subsections 355-715(2) and 995-1(1) (definition of 'feedstock revenue'),
and Note 2 to subsection 355-715(2) of the ITAA 19997, and subsection 12(7), and
sections 12B and 31 of the Income Tax Rates Act 1986, and section 355-720 of the
Transitional Provisions Act]
2.63 Notes are added to explain the interaction between the R&D
balancing adjustment provisions and the clawback and catch-up rules.
[Schedule 2, items 15, 16, 18, 19, 27, 28, 31 and 32, notes to subsections 40-292(1),
40-293(1), 355-315(2), 355-315(3), 355-525(2) and 355-525(3) of the ITAA 1997]
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Enhancing the integrity of the Research and Development Tax Incentive
2.64 As part of the remaking of Subdivision 355-G, the cap on
recoupment amounts is amended to clarify the meaning of the numerator
in the formula. [Schedule 2, item 29, subsection 355-440(4) (definition of 'R&D
expenditure') of the ITAA 1997]
2.65 An amendment is made to the tax incentive for early stage
investors to prevent the inclusion of clawback amounts in an R&D
entity's assessable income denying the status of an early stage innovation
company. [Schedule 2, item 37, subsection 360-40(2) of the ITAA 1997]
Application and transitional provisions
2.66 The amendments commence on the first day of the first quarter
following Royal Assent. [Section 2 of the Bill]
2.67 The amendments to Part IVA of the ITAA 1936 apply in relation
to R&D tax benefits obtained on or after 1 July 2019, regardless of when
the relevant scheme was entered into or carried out. [Schedule 2,
subitems 56(1) and (2)]
2.68 The amendments to the recoupment, feedstock and R&D
balancing adjustment rules, and the new clawback and catch-up rules,
apply in relation to income years starting on or after 1 July 2019. The new
clawback and catch-up rules may apply in an income year starting on or
after 1 July 2019 in relation to an R&D tax offset received in an income
year starting before that date (see Example 2.9 as it applies in relation to
the 2018-19 income year). [Schedule 2, subitem 56(3)]
2.69 Reforms to the R&D Tax Incentive were announced on 8 May
2018 to apply from 1 July 2018 as part of the 2018-19 Budget. An
Exposure Draft of the legislation implementing the 2018-19 Budget
reforms was released for public consultation in June 2018. Legislation to
give effect to the changes was introduced to Parliament in Treasury Laws
Amendment (Making Sure Multinationals Pay Their Fair Share Of Tax In
Australia And Other Measures) Bill 2018. However, this Bill lapsed with
the proroguing of Parliament in April 2019. Affected taxpayers were
aware of the Government's intention to reform the Incentive and the
potential impact the Budget reforms would have on the scope of the
program from the date of the Budget announcement.
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
2.70 The amendments to the General Anti-Avoidance Rule contained
in Part IVA of the ITAA 1936 ensure that the Commissioner can deny
inappropriate tax benefits by entering into artificial or contrived
arrangements. This is appropriate because tax avoidance schemes operate
contrary to the intention of the law. Affected taxpayers were aware of the
2018-19 Budget reforms and the potential impact they would have on the
scope of the program from the date of the Budget announcement. This Bill
also contains minor drafting changes to remove ambiguity in respect of
the operation of the general anti avoidance rule.
40
Chapter 3
Improving the administration of the
Research and Development Tax Incentive
Outline of chapter
3.1 Schedule 3 to the Bill improves the administrative framework
supporting the Incentive by making information about R&D expenditure
claims transparent, enhancing the guidance framework to provide
certainty to applicants and streamlining administrative processes.
Context of amendments
3.2 The Incentive is jointly administered by the Australian Taxation
Office (under the authority of the Commissioner) and the Board of ISA.
3.3 One of the conditions of an expense giving rise to a notional
deduction is that the R&D entity has registered an R&D activity under
section 27A of the IR&D Act (for example, subparagraph 355-205(1)(a)(i)
of the ITAA 1997).
3.4 Under Part III of the IR&D Act, the Board of ISA may make
findings about whether an R&D entity's activities are R&D activities. A
finding binds the Commissioner for the purpose of working out an R&D
entity's R&D tax offsets (section 355-705 of the ITAA 1997).
3.5 The Department of Industry, Innovation and Science and its staff
assist the Board of ISA to perform its functions. The Board and its
committees may delegate their functions to a Senior Executive
Service (SES) employee (subsections 21(1) and 22A(1) of the IR&D Act).
The Government has identified that this limit on the delegation power has
proved to be impractical and a significant barrier to the Board of ISA
carrying out its functions.
Extensions of time
3.6 Part 3 of the Industry Research and Development Decision-
making Principles 2011 (the Decision-making Principles) - made under
section 32A of the IR&D Act - regulates the ability of the Board of ISA
to grant extensions of time under the IR&D Act. This includes extensions
of time for registration applications, providing requested information and
applications for reviews (see subsection 3.1(1) of the Decision-making
Principles).
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
3.7 The Board of ISA must grant extensions of up to 14 days if it is
necessary and may grant a longer period if the applicant's ability to meet
the deadline is impaired by events outside the applicant's control
(section 3.2 of the Decision-making Principles). These extensions apply
on top of the time limits in the IR&D Act (for example, registration
applications under section 27D must be made within 10 months of the end
of the income year unless extended).
3.8 The Government has observed that very long extensions for
registration applications are granted, with applications often made and
accepted a number of years after the relevant R&D activities were
undertaken. This practice is inconsistent with the nature of the Incentive
as expenditure that occurs without a business being aware of the Incentive
would have occurred in the absence of the Incentive being available.
Summary of new law
3.9 Schedule 3 to the Bill makes a number of amendments to
improve the administration and transparency of the Incentive. These
include:
• publishing information about Incentive claimants and their
R&D expenditure;
• allowing the Board of ISA to make binding determinations;
• broadening the scope of the Board of ISA's delegation
powers; and
• imposing a three-month limit on extensions of time.
3.10 These legislative changes complement other aspects of the
Government's reforms to the administration of the Incentive, including
additional resourcing for additional compliance and legal activity, and the
creation of improved guidance products for claimants.
42
Improving the administration of the Research and Development Tax Incentive
Comparison of key features of new law and current law
New law Current law
Transparency of R&D claimants and activities
As soon as practicable after the No equivalent
period of two years following the end
of the financial year, the
Commissioner must publish
information about the R&D entities
that have claimed notional deductions
for R&D activities, including the
amount claimed.
ISA determinations
The Board of ISA may also make The Board of ISA may make findings
determinations about the specific to an R&D entity's
circumstances and ways in which it circumstances, including whether
will exercise its powers, or perform certain activities of the entity are
its functions or duties in relation to R&D activities.
the Incentive. These determinations Findings are binding on the
are binding on the Board of ISA. Commissioner.
ISA delegations
The Board of ISA and its committees The Board of ISA and its committees
may delegate their powers to any may delegate their powers to SES
member of Australian Public Service employees assisting them.
staff assisting them.
Extensions of time
The Board's ability to grant an The Board of ISA must grant
extension of time is subject to a cap extensions of time for registrations
of three months on the total extension and the provision of information of
available, unless the extension is up to 14 days if it is necessary and
granted to allow an applicant to wait may grant a longer period if an
for the outcome of a separate pending applicant's ability to meet the
decision. deadline is impaired by events
outside the applicant's control.
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
Detailed explanation of new law
Transparency of R&D claimants and expenditure
3.11 Two years after the relevant income year, the Commissioner is
required to publish information about the R&D activities of R&D entities
claiming the R&D tax offset. This will improve public accountability for
R&D claimants and encourage voluntary compliance with the program
while balancing these objectives against the potentially commercially
sensitive nature of the information being published. [Schedule 3, item 1,
subsections 3H(1) and (2) of the Taxation Administration Act 1953 (TAA 1953)]
3.12 The Commissioner must publish the following information:
• the R&D entity's name;
• the R&D entity's Australian Business Number, or Australian
Company Number if that is the only number available; and
• an amount representing the R&D entity's notional deductions
claimed taking into account any feedstock adjustments for
the year.
3.13 As noted in paragraph 2.24, an R&D entity's feedstock
adjustment (if it has one) is the lesser of the entity's feedstock revenue or
associated feedstock expenditure and is deducted from the entity's
notional deductions. If the R&D entity's feedstock adjustment exceeds its
notional deductions for the income year, the Commissioner must not
publish a dollar figure for the entity but must still publish the entity's
name and ABN or ACN. [Schedule 3, item 1, subsections 3H(3) and (4) of the
TAA 1953]
3.14 The criteria for the publication and the information published are
based on concepts defined in the ITAA 1997. [Schedule 3, item 1,
subsection 3H(8) of the TAA 1953]
3.15 The Commissioner must publish the information as soon as
practicable after the end of the period of two years starting at the end of
the financial year that corresponds to the R&D entity's income year. It is
envisaged that the Commissioner would publish the information of all
R&D entities at one time. [Schedule 3, item 1, subsection 3H(2) of the TAA 1953]
Source of information
3.16 The publication requirement will not apply in relation to R&D
entities that do not lodge income tax returns or otherwise claim an R&D
tax offset. In the case of consolidated groups and multiple entry
consolidated groups, the information published will be that reported by
the head company.
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Improving the administration of the Research and Development Tax Incentive
3.17 In determining whether the Commissioner is required to publish
information about a specific R&D entity, the Commissioner can only have
regard to the information that the entity has reported to the Commissioner.
3.18 Similarly, the Commissioner may only publish amounts that the
R&D entity reports, subject only to simple calculations. The
Commissioner is not permitted to substitute his or her own assessment of
an R&D entity's information for the purposes of determining the figures
to be published. However, the Commissioner may verify an R&D entity's
identity before publication to ensure that the correct entity is identified.
Correction of errors
3.19 Provision for the correction of errors is an important safeguard.
3.20 The Commissioner may correct errors that are made in a
publication in two circumstances: where the Commissioner has made an
error and on the initiative of the relevant R&D entity.
3.21 Where the Commissioner has made an error, he or she has
power to publish a correction. The correction must be made from the
information the R&D entity has reported. [Schedule 3, item 1, subsection 3H(7)
of the TAA 1953]
3.22 The Commissioner may also make information publicly
available that corrects an error that the R&D entity has brought to the
Commissioner's attention. [Schedule 3, item 1, subsections 3H(5) and (6) of the
TAA 1953]
3.23 The Commissioner has discretion in deciding whether to publish
a correction, including discretion as to the time and form of the
publication.
ISA determinations
3.24 The Board of ISA may, by notifiable instrument, make a
determination about how it will exercise its powers, and perform its
functions and duties. However, a determination cannot relate to the
exercise of powers, or the performance of functions or duties, in a
particular case or in relation to a particular R&D entity. [Schedule 3, item 16,
section 31C and subsections 31D(1) and (2) of the IR&D Act]
3.25 Determinations seek to augment the existing program guidance
by allowing the Board of ISA to publicly state its position on the
application of its functions and its interpretation of the legislation,
including the definition of R&D activities, the definition of clinical trials
or any other administrative matters where specific guidance would reduce
the compliance burden for R&D entities.
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
3.26 This is intended to make compliance easier for R&D entities, as
they will be able to better understand what is required to demonstrate
eligibility for the R&D Tax Incentive. For example, the Board of ISA may
make a determination about the validity of particular forms of evidence
for R&D activities, thereby providing registrants with increased clarity on
how to best evidence their R&D activities in their registration
applications. This would improve compliance and reduce administrative
workloads.
3.27 Determinations are generally binding on the Board of ISA. The
ability to make determinations binding on itself allows the Board of ISA
to provide certainty to R&D claimants and helps ensure R&D entities do
not unintentionally misinterpret the meaning of the law. [Schedule 3, item 16,
section 31D(3) and (4) of the IR&D Act]
3.28 However, determinations are not binding when an R&D entity
seeks a review of a decision. Determinations are intended to operate in a
similar manner to a taxation ruling issued by the Commissioner.
Determinations are not binding on R&D entities. R&D entities may
continue to self-assess their eligibility for the R&D Tax Incentive in a
manner that is inconsistent with a determination but risk the Board of ISA
contesting their position. If R&D entities believe a determination is
incorrect, they may challenge it by seeking a review of a decision made
consistently with the determination.
3.29 Determinations are notifiable instruments rather than legislative
instruments (see sections 8 and 11 of the Legislation Act 2003). This
reflects the fact they are not binding on R&D entities and the long-
standing recognition that taxation rulings are not legislative instruments
(section 7 of the Legislation (Exemptions and Other Matters)
Regulation 2015). [Schedule 3, item 16, subsection 31D(1) of the IR&D Act]
3.30 Making determinations notifiable instruments increases the
certainty they provide to registrants. The disallowable nature of legislative
instruments would undermine the Board's ability to produce
determinations that can be relied on by R&D entities. A disallowance
period would create uncertainty about the validity of a determination until
that period had ended.
3.31 Determinations are to be co-designed and developed in
consultation with relevant stakeholders, including administrators, subject
matter experts, tax advisers and peak bodies representing R&D entities by
size and sector. Merits review (under Division 5 of the IR&D Act) and
judicial review is available for R&D entities in the event of a dispute over
a determination. The development process is intended to ensure that
determinations are stable and reliable forms of guidance that can be relied
upon by R&D entities over long periods of time.
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Improving the administration of the Research and Development Tax Incentive
Amending or revoking a determination
3.32 Subsection 33(3) of the Acts Interpretation Act 1901 provides
that a power to make an instrument includes the power to revoke or vary
the instrument.
3.33 These amendments provide specific circumstances when the
Board of ISA must amend or revoke a determination by notifiable
instrument. The amendments clarify that this does not limit the application
of subsection 33(3) of the Acts Interpretation Act 1901 in relation to the
power to make a determination. That is, the Board of ISA may amend or
revoke a determination in a broader range of circumstances than those
specified in the legislation. [Schedule 3, item 16, subsection 31E(3) of the
IR&D Act]
3.34 A determination has no effect to the extent of any inconsistency
with the IR&D Act, the Industry Research and Development
Regulations 2011 or the Decision-making Principles. If such
inconsistency exists, the Board of ISA must revoke or amend the
determination to remove any inconsistency. [Schedule 3, item 16,
subparagraph 31E(1)(b)(iii) and subsections 31D(4) and 31E(2) of the IR&D Act]
3.35 If the Board of ISA makes a finding specific to an R&D entity, it
must be consistent with any relevant determinations. An R&D entity may
still challenge a specific finding under Division 5 of the IR&D Act on the
basis that the finding is incorrect and the underlying determination is
similarly incorrect. An R&D entity may also challenge a finding on the
basis that it is inconsistent with a determination.
3.36 In the event that a determination is found to be incorrect in a
review decision or must be regarded as incorrect following a review
decision, the Board of ISA must revoke or amend the determination so it
is no longer incorrect. [Schedule 3, item 16, paragraph 31E(1)(a) and
subsection 31E(2) of the IR&D Act]
3.37 The Administrative Appeals Tribunal may review an internal
review decision of the Board of ISA. If a determination is inconsistent
with a decision of the Administrative Appeals Tribunal, the Board of ISA
must revoke or amend the determination so it is no longer inconsistent.
[Schedule 3, item 16, subparagraph 31E(1)(b)(ii) and subsection 31E(2) of the
IR&D Act]
3.38 The Board of ISA must also revoke or amend a determination
that is inconsistent with a decision of a court. [Schedule 3, item 16,
subparagraph 31E(1)(b)(i) and subsection 31E(2) of the IR&D Act]
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
ISA delegations
3.39 The Board of ISA and its committees may delegate some or all
of their functions to members of the Australian Public Service staff
assisting the Board. This expands the existing delegation power that
authorised the Board to delegate to SES employees. [Schedule 3, items 18
and 19, subsection 22A(1) and paragraph 21(1)(e) of the IR&D Act]
3.40 The current limit on the delegation power has proved to be
impractical and a significant barrier to the Board of ISA carrying out its
functions necessary to the operation of the R&D Tax Incentive. These
functions include the annual processing of around 14,000 registration
applications as well as hundreds of compliance activities. It is
unsustainable and impractical for a small number of SES delegates to be
responsible for this volume of decision making.
3.41 The expansion of the delegations powers allows additional staff
to be delegated responsibility for a number of administrative program
tasks. This includes, but is not limited to, high-volume, low-risk functions
such as the approval to grant an extension of time to submit applications,
or the ability to request information on an application. Prior to the
introduction of the current SES limit, a broader delegation power was
used effectively and efficiently on a long-standing basis.
3.42 The expansion of the delegations powers also acknowledges the
continual growth in the size of the R&D Tax Incentive and the consequent
growth in resourcing needed to carry out the functions necessary for the
Incentive's effective administration.
Extensions of time
3.43 Extensions of time granted under the IR&D Act may relate to an
application to register R&D activities, provide further information
requested by the Board of ISA, a form to continue registration as a
research service provider or an application for review of a reviewable
decision. An extension will apply on top of the time limits in the
IR&D Act.
3.44 The Board of ISA must not grant extensions of time under the
IR&D Act in excess of three months. [Schedule 3, item 20, subsection 3.2(3) of
the Decision-making Principles]
3.45 Restricting extensions to three months mitigates the risk that
long extensions granted by the Board of ISA result in applications being
accepted a number of years after the relevant R&D activities are
undertaken. Such timeframes are inconsistent with the objectives of the
Incentive as expenditure that occurs without a business being aware of the
Incentive would have occurred in the absence of the Incentive being
available.
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Improving the administration of the Research and Development Tax Incentive
Further extensions for pending decisions
3.46 This restriction does not apply if the subject matter of the
extension relates to a pending decision on another matter. That is, the
restriction does not apply if the extension relates to a matter
corresponding with the subject of a decision relating to the R&D entity
where that decision has not been finalised. [Schedule 3, item 20,
subsection 3.2(4) of the Decision-making Principles]
3.47 This allows the Board of ISA to grant an extension in excess of
three months where this is necessary to provide a deadline due after the
pending decision is made in relation to decisions of the Board of ISA
under Division 2, 3 or 5 of Part III of the IR&D Act. This facilitates more
administratively efficient outcomes.
Example 3.1 Granting extension pending ISA decision
Doppler Dynamics seeks a review of an unfavourable registration
decision in relation to the 2019-20 income year. The review (including
appeals) is finalised in May 2022.
During the course of the review, Doppler Dynamics needs to consider
applying for registration in subsequent years for the same ongoing
activities subject to the review. It would not be efficient for it to lodge
applications that may need to be varied or that may lead to decisions
that need to be set aside following the outcome of the review.
In these circumstances, it is reasonable for the Board of ISA to exercise
its discretion to grant an extension of time until after the pending
decision is made.
Amendments to the Decision-making Principles
3.48 The amendments made by the Bill to the Decision-making
Principles do not prevent the Decision-making Principles from being
amended or repealed by an instrument made under section 32A of the
IR&D Act (see subsection 13(5) of the Legislation Act 2003). [Note to
Section 3 of the Bill]
Consequential amendments
3.49 A note is amended to explain that the publication of R&D
entities' R&D tax offset claims is not affected by the taxpayer secrecy
provisions. [Schedule 3, item 2, note to section 355-50 in Schedule 1 to the TAA 1953]
3.50 The simplified outline of Part III to the IR&D Act is amended to
reflect the Board of ISA's new power to make determination about how it
will exercise its powers, and perform its functions and duties. [Schedule 3,
items 5, section 26A of the IR&D Act]
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
3.51 Other amendments are made to the IR&D Act to reflect the
introduction of findings about clinical trials (see paragraph 1.31).
Application provisions
3.52 The amendments commence on the first day of the quarter
following Royal Assent. [Section 2 of the Bill]
3.53 The transparency amendments apply to income years starting on
or after 1 July 2019. [Schedule 3, item 3]
3.54 The transparency amendments apply retrospectively and were
announced by the Government in the 2018-19 Budget, making taxpayers
aware of the changes from the time of the announcement. The
amendments improve the administrative framework supporting the
Incentive by making information about R&D expenditure claims
transparent.
3.55 Affected taxpayers were aware of the reforms and the potential
impact they would have on the scope of the program from the date of the
Budget announcement. An Exposure Draft of the legislation implementing
the amendments was also released for public consultation in June 2018,
prior to the 1 July 2019 application date.
3.56 The Board of ISA's power to make determinations applies in
relation to the exercise of powers, and the performance of functions and
duties, by the Board of ISA on or after commencement. [Schedule 3, item 17]
3.57 The amendments to the Board of ISA's delegation and extension
of time powers apply to delegations and extension of time decisions made
on or after commencement. [Section 2 of the Bill]
50
Chapter 4
Regulation impact statement
Background
4.1 Innovation is an important driver of productivity and economic
growth, and Research and Development (R&D) is an important input to
innovation. The economic impact of business investment in R&D,
however, goes beyond the benefits accruing to the firm undertaking the
R&D and spills over to other firms and the economy as a whole.
Businesses may also have difficulty obtaining finance due to the uncertain
returns from R&D activities. As a result, international research (including
by the OECD) has found that firms typically underinvest in R&D relative
to what is socially optimal.
4.2 The underinvestment by business in R&D represents a market
failure and has been recognised internationally as justification for
government intervention. In Australia, the Government primarily supports
business R&D through the R&D Tax Incentive (R&DTI). While a socially
optimal investment level is a theoretical construct and therefore unable to
be quantified, providing support for business R&D is likely to represent a
positive movement towards optimal investment.
4.3 The R&DTI program is the largest component of Australian
Government support for business R&D. In the 2016-17 income year, over
12,000 R&D-performing companies claimed the R&DTI. According to
the 2018-19 Science, Research and Innovation Budget tables, the
estimated cost of the R&DTI program is around $2.0 billion in 2019-20.
4.4 In the 2018-19 Budget, the Government announced reforms to
the R&DTI. The reforms sought to address the findings of the successive
reviews of the R&DTI, while also taking into account the considerable
stakeholder feedback received over a two year period between the release
of the Review report in 2016 and the 2018-19 Budget.
4.5 The reforms were to commence on 1 July 2018 and contained a
number of measures to better target the R&DTI towards additional R&D
activities, and improve the fiscal sustainability, integrity and
administration of the program. This included:
• the introduction of a $4 million cap on cash refunds for the
refundable component of the R&DTI with an exemption for
clinical trials;
• introducing a non-refundable R&D premium calculated with
reference to the claimant's company tax rate and R&D
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
intensity (R&D expenditure as a proportion of total business
expenses). The premium increases with R&D intensity,
rewarding companies for conducting a high intensity of
R&D;
• an increase in the R&D expenditure threshold from $100
million to $150 million;
• linking the R&D tax offset rate to the prevailing company tax
rate; and
• changes to improve the integrity of the program.
4.6 A Bill to implement these reforms was introduced to the
Parliament on 20 September 2018. The Bill was subsequently referred to
the Senate Economics Legislation Committee, which released its report on
11 February 2019. In the report, the Committee acknowledged the need
for reform of the R&DTI, but recommended that consideration of the Bill
be deferred until further analysis of the impacts of the Bill could be
undertaken.
4.7 The Bill lapsed when Parliament was prorogued on 11 April
2019. However, the Government considers that the case for reform
remains, and is now reintroducing a Bill to implement the reforms with
several amendments formulated following feedback from stakeholders
and the findings of the Senate Inquiry.
The problem
Current government support for R&D does not fully meet its objectives
4.8 The National Innovation and Science Agenda (NISA) was
launched on 7 December 2015. When launching the NISA, the
Government committed to undertaking a review of the R&DTI (the
Review).
4.9 The Review was conducted by a review panel comprising Mr
Bill Ferris AC (then Chair of Innovation Australia), Dr Alan Finkel AO
(Chief Scientist) and Mr John Fraser (then Secretary of the Department of
the Treasury). The review panel was supported by an interdepartmental
taskforce comprising officers from the Department of Industry, Innovation
and Science (DIIS), the Treasury and the Australian Taxation Office
(ATO).
4.10 The review panel, drawing on work conducted by the Centre for
International Economics (CIE), found that the R&DTI falls short of
meeting its stated objectives of additionality - encouraging R&D
investment that would not occur in the absence of the program - and
spillovers. The panel identified a number of areas where improvements
52
Regulation impact statement
could be made in order to improve the effectiveness and integrity of the
program, primarily achieving a stronger focus on additionality.
4.11 On 30 January 2018, Innovation and Science Australia (ISA)
released its report to the Government, Australia 2030: Prosperity through
Innovation (the ISA 2030 Plan). The ISA 2030 Plan also found that
reforms to the R&DTI were required to improve the program's
effectiveness and integrity, and included alternative recommendations to
reform the R&DTI.
Inherent difficulties in measuring program effectiveness
4.12 The intended outcomes of the R&DTI - additionality and
spillovers - are very difficult to quantify and necessitate analysis that
relies heavily on anecdotal and qualitative evidence.
4.13 In its program evaluation, the CIE stated that:
The two most crucial elements of the R&D TI (additionality and
spillovers) turn out to be extremely difficult to empirically measure
and evaluate.
Additionality cannot be directly measured and must be inferred
through interviews, surveys, statistical analysis and modelling.
Therefore, estimates of additionality will always be imprecise and
subject to uncertainty.
Spillovers, while in principle evident from the techniques of growth
accounting, have also proved to be extremely difficult to measure
empirically.
4.14 Despite the difficulties noted above, the CIE attempted to
measure additionality levels in Australia using a mix of survey data and
statistical analysis. DIIS also commissioned the Centre for Transformative
Innovation at Swinburne University to undertake an econometric analysis
evaluating the level of program additionality.
4.15 The analyses found results broadly consistent with studies from
other countries (0.3 to 1.5 additional dollars of R&D per dollar of tax
forgone for CIE, and 0.8 to 1.9 for Swinburne). There is also common
agreement that additionality is greater for small companies than large
companies.
4.16 A key finding of the Review and the CIE is that, at a conceptual
level, the program's volume based design (i.e. all R&D attracts the same
benefit) is poorly targeted towards incentivising additional R&D.
4.17 The most recent estimate of spillovers in an Australian context
was presented by the Productivity Commission (the PC) in 2007. The PC
estimated that a 1 per cent increase in market R&D led to approximately
0.02 per cent increase in productivity or 65 cents of average spillover
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
benefit from each dollar of R&D conducted. It should be noted that this
estimate relates to market-induced business R&D (that is, R&D that
would have occurred in the absence of government support).
4.18 There is limited data in relation to spillover benefits and it is not
expected that the reformed program will assist in overcoming these
measurement issues.
Case for government action/objective of reform
4.19 Businesses generally invest less in R&D than is socially optimal
due to their inability to fully appropriate the returns; the inherently risky
nature of R&D activities; and the related uncertainty around their
outcomes. There is a widely agreed role for government intervention to
address this market failure and encourage additional R&D.
4.20 The Review found that the current R&DTI falls short of meeting
its objectives of encouraging additionality and spillovers. Reform of the
R&DTI is required to ensure the efficacy and cost effectiveness of the
program. The OECD has found that 'basic research' (i.e. experimental or
theoretical work undertaken primarily to acquire new knowledge, without
any particular application or use in view) results in larger spillovers than
applied research (i.e. experimental or theoretical work directed primarily
towards a specific practical aim or objective).
4.21 There is, however, no evidence that specific industries or types
of R&D produce additionality and spillovers in greater amounts than other
industries or types of R&D. Therefore it is important that the R&DTI is
industry-neutral, aiming to incentivise novel R&D in all sectors of the
economy. This is catered for under the R&DTI through the broad
definition of what constitutes eligible R&D.
4.22 The Review found a relatively low level of additionality under
the current R&DTI, stating that "volume-based tax instruments such as
the Incentive not only subsidise this additional R&D but also support the
activities a company would have done anyway." That is, the program
provides the same level of support for all eligible R&D activities
undertaken by a claimant, with no requirement to demonstrate that it is
additional to 'business-as-usual' R&D that would have been progressed in
the absence of government support. However, it should be noted that
volume-based tax instruments tend to impose a lower regulatory burden
on claimants, as eligibility is largely self-assessed.
4.23 The Review found that the program design could be improved
by reducing support for business as usual activities and refocusing support
towards additional R&D, particularly in the non refundable portion of the
program (available to larger businesses with $20 million or more turnover
per annum).
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Regulation impact statement
4.24 The Review recommended improving the R&DTI's
additionality for larger businesses by redirecting government support to
R&D intensive companies - R&D intensity was defined as R&D
expenditure as a proportion of total business expenditure. Compared to
companies with lower R&D intensity, these claimants make more efficient
use of scarce R&D resources such as skilled labour and specific capital
equipment and are more likely to be induced to increase their investment
in R&D (i.e. generate increased additionality and thus produce greater
spillover benefits). It is also acknowledged that most companies will
undertake some R&D to keep up with competitive pressures and
additional R&D will necessarily fall into higher intensity bands.
4.25 The Review found that although the R&DTI provides effective
support for small and medium sized enterprises (SMEs) via its refundable
component (available to companies with annual turnover below $20
million), the significant growth in the number of SMEs participating in the
program since its introduction was placing upward pressure on program
costs. To address this, the Review recommended keeping the rate of
benefit unchanged, but capping cash refunds for refundable R&D tax
offset claimants as a way of placing some restraint on the maximum level
of payment that can be made (SMEs can currently 'cash out' their entire
R&D tax offset if they are in a tax loss position).
4.26 New taxation data indicates that growth in the refundable
component of the R&DTI has moderated since the release of the Review
in April 2016. The main reasons for lower growth in refundable R&DTI
claims include the post-mining-boom business investment environment
and increased ATO and AusIndustry compliance activity. However,
factors such as the current business investment environment may not
persist over the longer-term and do not necessarily preclude the
re-emergence of fiscal pressures in the future.
4.27 Further, companies would need to be spending very large
amounts on R&D to exceed the cap on cash refunds for refundable R&D
tax offset claimants. These companies that would be impacted by a cap
are likely to have access to other sources of finance, in addition to the
R&DTI, to support their R&D activities. As the Review put it,
"Refundability is likely to provide fewer tangible benefits for SMEs with
larger R&D expenditures, who will be able to find alternative sources of
finance at relatively lower costs in comparison with firms with lower
R&D expenditure."
4.28 The Review also noted that " ... as the tax offsets under the
program are at a fixed level, they are relatively more valuable when the
company tax rate is lowered (in comparison to the deduction received for
normally deductible expenses). Hence, the fixed level of the tax offset
should always be calibrated to the level of the company tax."
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
4.29 The CIE's and other studies have shown that the companies
most responsive to financial incentives are often cash constrained R&D
start-ups, SMEs, and R&D-intensive companies (those companies whose
core business is R&D-centric). These companies generally devote a
greater proportion of their activities to R&D.
Policy options
4.30 This regulation impact statement compares the Government's
proposed reforms to the R&DTI to two other potential policy responses:
1) no policy change; and 2) adopting the Review recommendations.
Option 1: No policy change
4.31 If the Government took no action the R&DTI would continue in
its current form. The program currently has two core components:
• a 43.5 per cent refundable tax offset for eligible entities with
a turnover of less than $20 million per annum; and
• a 38.5 per cent non-refundable tax offset for all other eligible
entities. Unused non-refundable offset amounts may be able
to be carried forward to future income years.
4.32 The $100 million expenditure threshold would be maintained
until the legislated sunset date of 1 July 2024.
4.33 In the absence of the R&DTI, companies would deduct their
expenses at the relevant standard company tax rate (currently 27.5 per
cent for businesses with annual turnover less than $50 million and 30 per
cent for all other businesses). If a company was in tax loss, however, they
would not receive any immediate benefit.
4.34 The net benefit provided by the R&DTI is the difference
between the R&D offset rate and what the company would otherwise
receive in the absence of the program (i.e. the value of the standard tax
deduction). These rates can be seen in Table 4.1 below. As the corporate
tax rate for companies with a turnover of less than $50 million continues
to decrease over the coming years, the net benefit for these companies will
increase serendipitously if no change is made to the R&DTI.
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Regulation impact statement
Table 4.1: R&DTI Net Benefit Rates, 2019-20
Annual Company Tax R&DTI Offset Net Benefit
Turnover Rate (%) Rate (%)
0 - $20m 0 43.5 43.5 cents
(Unprofitable)
0 - $20m 27.5 43.5 16 cents
(Profitable)
$20m - $50m 27.5 38.5 11 cents
$50m and above 30 38.5 8.5 cents
4.35 Under the refundable tax offset, if a claimant's offset exceeds
their tax liability then the claimant receives the excess as a cash refund,
rather than carrying forward an amount to offset tax liabilities incurred in
future income years.
Option 2: The Review's Recommendations
4.36 The Review found that the program does not fully meet its stated
policy objectives and proposed a range of recommendations to improve its
effectiveness and integrity. The recommendations included initiatives to
encourage additional R&D. The Review's recommendations are
summarised in Table 4.2 below.
Table 4.2: Review's recommendations
Rec Detail
1. Retain the current scope of eligible activities and improve guidance
to registrants.
2. Introduce a collaborative premium of up to 20 per cent for the non-
refundable tax offset to provide additional support for the
collaborative element of R&D expenditures undertaken with
publicly-funded research organisations.
- The premium would also apply to the cost of employing new
STEM PhD or equivalent graduates in their first three years of
employment.
- Companies falling below the intensity threshold should still be
able to access both elements of the collaboration premium.
3. Introduce a cap on the annual cash refund (in the order of $2m)
with remaining offsets treated as non-refundable offset and carried
forward.
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
Rec Detail
4. Introduce a 1-2 per cent R&D intensity threshold for the non-
refundable element, such that only R&D expenditure over the
threshold attracts a benefit. Intensity is defined as the proportion of
R&D expenditure over total expenditure.
5. If an R&D intensity threshold is introduced, increase the R&D
expenditure threshold from $100m p.a. to $200m p.a.
6. Investigate options for improving the administration of the R&DTI
(e.g. adopting a single application process; developing a single
program database; reviewing the two-agency delivery model; and
streamlining compliance review and findings processes, publishing
annually the names of companies claiming the R&DTI and the
amounts of R&D expenditure claimed) and additional resourcing
that may be required to implement such enhancements. To improve
transparency, the Government should also publish the names of
companies claiming the R&DTI and the amounts of R&D
expenditure claimed.
Option 3: Targeted reforms to the R&DTI (preferred option)
4.37 The Government's option is to proceed with targeted reforms to
the R&DTI. These reforms comprise a number of targeted changes to the
R&DTI including:
• a $4 million cap on cash refunds with an exemption for
clinical trials;
• an R&D premium that rewards companies that commit a
greater proportion of expenses to R&D;
• an increase in the R&D expenditure threshold from $100
million to $150 million;
• linking the R&D tax offset rate to the prevailing company tax
rate;
• introducing a new power for ISA to make 'general
determinations'; and
• changes to improve the integrity of the program.
4.38 The changes would apply to income years starting on or after
1 July 2019.
4.39 The reforms include a $4 million annual cap on cash refunds for
R&D claimants with aggregated annual turnover less than $20 million.
Amounts in excess of the cap would become a non-refundable tax offset
to be carried forward into future income years. Expenditure on clinical
trials would be excluded from the $4 million cap on cash refunds,
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Regulation impact statement
recognising the critical role of clinical trials in developing life changing
drugs and devices.
4.40 To help ensure support provided under the program is well
targeted, the new R&D premium refocusses support for larger companies
(with annual turnover of $20 million or more) towards those companies
which devote a greater proportion of their expenses to R&D (i.e. with
higher R&D intensity), while continuing to provide a baseline level of
support for companies with lower R&D intensity. The R&D premium
provides multiple rates of non-refundable R&D tax offsets, increasing
with the intensity of companies' R&D expenditure. The increasing rate of
support provides companies with a greater incentive to undertake
additional R&D activities.
4.41 The current $100 million expenditure threshold would be
increased to $150 million and made a permanent feature of the law. The
higher expenditure threshold encourages large companies to spend more
on R&D, as a greater proportion of their R&D expenditure will be eligible
for the R&DTI.
4.42 See Table 4.3 for the rates of benefit provided by the R&D
Premium. Box 1 provides an example of how the R&D Premium would
operate in conjunction with the increased expenditure threshold.
4.43 The rates of the R&D tax offsets would be linked to each
claimant's company tax rate, removing the need for ongoing legislative
amendments to the R&DTI tax offset rates as company tax rates change
(see Table 4.3). This ensures that companies receive a fixed premium
(above the value of a standard tax deduction) for R&D expenditure as the
Government's corporate tax cuts take effect. This also removes
differences in support due to the disparity between the turnover thresholds
that determine a company's corporate tax rate and its level of support
under the R&DTI.
Table 4.3: The new R&DTI tax offsets
R&DTI tax offset Rate of offset
Refundable R&D tax The claimant's tax rate for the year plus 13.5 percentage
offset points.
(companies with turnover
less than $20 million)
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
Non-refundable R&D The claimant's tax rate for the year, plus:
tax offset • 4.5 percentage points for R&D expenditure
(companies with turnover between 0 per cent and 4 per cent R&D intensity
of $20 million or more) (inclusive);
• 8.5 percentage points for R&D expenditure above
4 per cent to 9 per cent R&D intensity (i.e. not
including R&D expenditure falling within the first
4 per cent of the claimant's total expenses for the
year); and
• 12.5 percentage points for R&D expenditure
above 9 per cent intensity (i.e. not including R&D
expenditure falling within the first 9 per cent of
the claimant's total expenses for the year).
Box 1 - How does the expenditure threshold work?
For a given income period, if Company A has total business expenses of $800
million and eligible R&D expenditure of $125 million, the company has a 15.6
per cent R&D intensity ($125 million / $800 million). Under existing policy
settings, the company would receive the 38.5 per cent non-refundable R&D tax
offset on the first $100 million of R&D expenditure. The excess amount above
the threshold, $25 million, would receive an offset at the company's company
tax rate (a 30 per cent offset assuming the company's turnover is above $50
million). This would result in a total non-refundable tax offset of $46 million.
Under the R&D Premium with an associated increase of the expenditure
threshold to $150 million, the first $32 million (4% of $800 million) would
attract an offset of $11 million (34.5 per cent x $32 million). The next $40
million would receive an offset of $15.4 million (38.5 per cent x $40 million).
The remaining $53 million would receive an offset of $22.5 million (42.5 per
cent x $53 million), resulting in a total non-refundable tax offset of around $49
million. As before, any R&D expenditure above the expenditure threshold (now
$150 million), would receive an offset calculated at the company's tax rate
(without any premium).
4.44 The ISA Board would have the power to publish 'general
determinations', which would be binding on the ISA Board. The general
determinations would provide guidance on the circumstances in which the
Board can exercise its powers or perform its functions or duties in relation
to the R&DTI.
4.45 Lastly, the targeted reforms would improve the integrity of the
R&DTI by strengthening anti avoidance rules, publishing claimant details
and amounts of R&D expenditure claimed and improving guidance to
help ensure that taxpayers do not make incorrect claims. The reforms
would also make the rate at which the offset is recouped (i.e. feedstock
and clawback rules) more accurate in situations where receiving the R&D
tax offset would result in a company accruing an additional benefit.
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Regulation impact statement
Impact analysis of each option
4.46 To receive a benefit under the R&DTI, companies must go
through a two stage process: registering R&D activities with the DIIS; and
then claiming the incentive for the related expenditure in their annual tax
return (including an R&D Tax Schedule) with the ATO. The activities
associated with the registration and claiming processes comprise the
R&DTI's regulatory costs. As with the rest of the taxation system, over 80
per cent of companies that register for the R&DTI use consultants to assist
with their applications. The fees paid to these consultants impose a
regulatory burden on registrants, and are therefore considered when
determining the regulatory costs of the different options.
Option 1: No policy change
4.47 Under this option, no action would be taken by the Government
and the current R&DTI continues unchanged. There is therefore no
change to the regulatory cost of the program.
Benefits
4.48 The benefit of this option would be that there is no increase in
regulatory burden for claimants.
Costs
4.49 The cost of this option would be that the Government continues
to provide support to 'business as usual' R&D which would likely have
been conducted anyway (i.e. in absence of the program). The R&DTI
would continue to fail to fully meet the program's objective of
encouraging greater additionality in R&D activities.
4.50 There would also be a risk that future growth in the number of
companies in the program or claim amounts could place upward pressure
on program costs, without an attendant increase in additionality.
4.51 Program costs will also continue to rise as the Government's
company tax cuts come into effect. Without changes to offset rates, the
lower company tax rates increase the effective benefit of the R&DTI and
the resulting cost to government.
Option 1 - Net outcome
4.52 While there would be no change to the regulatory burden on
business, the identified deficiencies in the efficacy of the program would
continue, limiting the economic benefits and cost effectiveness of the
R&DTI.
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
Option 2: R&DTI Review Recommendations
4.53 This option would implement the recommendations of the
Review without any alterations.
Benefits
4.54 Introducing a minimum R&D intensity requirement would target
support towards companies that are the most significant participants in
Australia's R&D landscape. As the benefit would not be provided for
R&D expenditure under the threshold (the Review found that at least such
a level of expenditure would be expected as business as usual in a truly
innovative company), the intensity threshold is more likely to direct
support to companies investing in additional R&D.
4.55 Companies below the threshold would no longer be eligible to
receive a benefit under the program, which, in some cases, may reduce the
overall administrative burden. This would be due to fewer companies
needing to complete the registration process and separately account for
related expenses, therefore removing the need for associated record
keeping and compliance-ready measures.
4.56 The Review also recommended that the $100 million
expenditure threshold should be increased to $200 million so that large
R&D intensive companies retain an incentive to increase R&D in
Australia. The higher expenditure threshold, when combined with the
intensity threshold, would likely sharpen the additionality of larger
companies. This is because the companies in a position to benefit from the
higher expenditure threshold would be able to register more R&D
activities in order to receive the greater benefit.
4.57 A $2 million cap on cash refunds would constrain the costs of
the refundable R&D offsets under the program. At the time of the Review,
the refundable R&D offset was the most costly element of the program
and was growing at unsustainable rates. However, it should also be noted
that these companies were found by the Review to be the most responsive
to support being provided and the most likely to reinvest the support
provided into additional R&D.
Costs
4.58 The introduction of an intensity threshold in isolation is
estimated to deny an R&DTI benefit to those claimants with intensities
less than 1 or 2 per cent. Conceptually, the companies falling below the
threshold are more likely to be undertaking 'business as usual' R&D than
'additional' R&D. While business as usual R&D is expected to continue
without Government support, there may be an overall decline in R&D that
would have been conducted in Australia. For example, this measure would
impact some businesses for which R&D is complementary rather than
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Regulation impact statement
central to their core activity - such as manufacturing. In these businesses,
while R&D intensity might not be high due to the relatively high level of
expenditure on other costs, the introduction of the threshold could reduce
their incentive to conduct additional R&D.
4.59 A $2 million refund cap may deter some start-ups from investing
in additional R&D and could significantly impact the development of new
innovative start-up companies in Australia. The biotech and medical
industries would be particularly affected. These industries are generally
very R&D intensive, with long term R&D projects that require large
amounts of persistent capital and financing. The industry frequently incurs
large expenses before any returns on investment are made. There is often
a long time between the initial R&D and commercialisation due to the
rigorous safety and efficacy testing requirements required for new
medications and medical devices. Without a specific exemption, the $2
million cap could force clinical trial activities offshore as the cash refund
cap would limit cash flow.
4.60 The collaboration premium may be limited in its ability to
effectively increase the level of collaboration. While the collaboration
premium would reward companies for collaborating with publicly funded
research organisations, factors such as the differing objectives of industry
and universities in conducting research and poor mobility between
academia and businesses would remain significant inhibitors of
collaboration. Further, as with the R&DTI generally, additional support
would be offered for collaborative R&D activity already underway at no
additional benefit to the taxpayer. A collaboration premium also creates
the potential for distortionary impacts and rorting. For example, a
company with the internal capability to undertake R&D may choose to
outsource the activity simply to receive a higher benefit rate. This would
not be an efficient allocation of resources.
Option 2 - Net benefit
4.61 The net result would be lower regulatory costs for the R&DTI,
largely driven by changes that effectively exclude companies from
accessing the program.
4.62 The intensity threshold precludes a significant number of non-
refundable claimants from accessing the R&DTI. As these companies
would no longer be required to register their R&D activities or complete
the R&D schedule to their tax return, their regulatory burden is reduced.
4.63 The $2 million refund cap proposed by the Review is
significantly more restrictive than the $4 million refund cap included in
the targeted reforms to the R&DTI (Option 3) and has no exemptions. It
would be expected to adversely impact smaller companies with
significant, longer term investments in R&D (including biotech, medtech
and life science companies). These companies might have to go to
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
significant effort and incur higher costs to secure alternative sources of
financial support should they choose to continue their R&D activities in
Australia.
4.64 The design elements of the collaboration premium - such as the
specific definition of 'collaboration', the eligibility criteria and the
claiming process - were not elaborated upon by the Review. While the
Review proposes a premium rate for collaborative R&D, those activities
are already eligible under the current program arrangements. The
regulatory impact would require separating out the related expenses. This
is likely to occur already through contract agreements, given intellectual
property is being created. As a result, the regulatory impact from the
measure is believed to be negligible.
4.65 Regulatory costings for the Review recommendations are lower
than the Option 3 reforms as a result of companies being excluded from
the program, which reduces registration, record keeping and audit costs
for these companies.
4.66 Overall, this option would result in an estimated total average
annual regulatory saving for businesses of $12.3 million.
Table 4.4: Regulatory burden estimate (RBE) table (Option 2)
Average annual regulatory costs (from business-as-usual)
Change in costs Business Community Individuals Total change in cost
($ million) organisations
Total, by sector $12.3 save Nil Nil $12.3 save
*Average annual impact (calculated over 10 years).
Option 3: Targeted reforms to the R&DTI (preferred option)
4.67 Under this option, the Government's targeted reforms to the
R&DTI would be implemented.
Benefits
4.68 Introducing an R&D Premium for larger claimants would target
support towards R&D intensive companies that are the most significant
participants in Australia's R&D landscape. R&D intensive companies are
considered to be more responsive to fiscal incentives intended to support
R&D. Focussing on targeting these companies would therefore better
target the program's focus on additionality and spillovers.
4.69 Under the R&D Premium, large companies with lower R&D
intensities will have their R&D claims reduced, resulting from the
reduction in the level of support for R&D expenditure that is more likely
to be business as usual. The level of support will be increased for R&D
that is more likely to be additional. The reduced support for business as
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Regulation impact statement
usual R&D and increased support for additional R&D expenditure is
expected to improve the additionality of the program.
4.70 Although companies with low R&D intensities are expected to
have some behavioural response to the reduction in their overall support,
their response may be quite small. This is because the reduction in support
is for R&D expenditure that is more likely to be business as usual - that
is, likely to be conducted even in the absence of the program.
4.71 There are a number of distinct benefits of targeting support for
larger companies under the program towards those that are more R&D
intensive. The Review found that large R&D intensive companies are
more likely to:
• use R&D inputs such as skilled labour and specialised
equipment efficiently;
• partner with other bodies, increasing prospects for spillover
benefits; and
• be undertaking basic research and novel R&D (found to
generate greater spillovers).
4.72 The current $100 million expenditure threshold would be
increased to $150 million and made a permanent feature of the law. The
higher expenditure threshold would encourage large companies to spend
more on their R&D in Australia.
4.73 The package of changes to the non-refundable R&DTI is
estimated to provide a higher average level of support to approximately 25
companies compared to the existing program. This modelling is based on
tax administration data reported for the 2016-17 income year.
4.74 A $4 million cap on cash refunds would sharpen the R&DTI's
focus on additional R&D activity by ensuring that government resources
are provided to those most in need. The $4 million cap would place a
reasonable constraint on the amount of refund provided to a company in a
given year. Companies would retain access to the full amount of their
R&D offset but, refundable amounts exceeding $4 million would be
carried forward as a non refundable tax offset for use in future years.
4.75 To be impacted by the cash refund cap of $4 million, a company
needs to spend around $10 million on eligible R&D expenditure in an
income year. R&D spending of this size cannot be sustained by tax
refunds alone, resulting in the conclusion that these companies have
access to alternative sources of finance. As one of the key rationales of the
refundable component of the program is to support small, cash
constrained SMEs, there is little policy rationale in providing unlimited
Government funding to companies capable of obtaining finance through
private means. As is the case with most other international jurisdictions
offering cash refund for R&D activities (e.g. Denmark, Ireland and
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
Spain), it is reasonable for an upper limit to be placed on the amount of
cash benefit a company can receive in an income year.
4.76 The reforms to the refundable tax offset would also include a
carve out for clinical trials. This carve out would mean that eligible
expenditure incurred on clinical trials would be exempt from the $4
million cap. The carve-out would ensure that support is maintained for
critical drug and medical device development.
4.77 Linking R&D offset rates to the company tax rate would address
the expected program cost increases resulting from the proposed company
tax rate reductions in a manner which avoids the need to amend the tax
law in the future. In the absence of linking to company tax rates, the
program would need to be amended every time the company tax rate was
changed in order to maintain the level of benefit available under the
R&DTI. The linking also removes the different levels of support that is
caused by the disparity between the turnover thresholds that determine a
company's corporate tax rate and its level of support under the R&DTI.
4.78 The ISA Board would have the ability to publish 'general
determinations', which would be binding on the ISA Board and pertain to
the circumstances in which the Board can exercise its powers or perform
its functions or duties in relation to the R&DTI. The broad scope of
general determinations would assist in improving the clarity of advice
provided to industry claimants, and would provide program participants
with clearer guidance about eligibility and other requirements. Practically,
this is expected to result in reduced time and money devoted to program
registration and dealing with compliance activities. Clearer guidance and
eligibility will also result in a reduced need for companies to engage
consultants and expert advice when engaging with the program.
4.79 Amending Part IVA of the Income Tax Assessment Act 1936, to
include both the refundable and non-refundable R&D tax offsets in the
definition of a 'tax benefit' would provide the ATO with the ability to
challenge contrived tax arrangements that seek to utilise R&D tax offsets.
Costs
4.80 Around 1,030 (65 per cent) of companies claiming the non-
refundable R&D tax offset currently have intensities of 4 per cent or
lower, giving these firms access to the lowest R&D Premium. The
remaining non-refundable offset recipients (approximately 550) have
intensities greater than 4 per cent.
4.81 Some companies receiving the refundable R&D offset would see
a reduction in their overall benefit amount as a result of linking to the
company's tax rate.
4.82 It is estimated that a $4 million cap would impact the cash
refund values of around 20 claimants receiving the refundable offset,
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Regulation impact statement
taking into account other elements of the package. These registrants
would no longer receive a cash refund for amounts in excess of the $4
million cap, however they would be able to carry forward the excess
amounts to future financial years as a non-refundable tax offset.
4.83 For companies that are impacted by the cap on cash refunds,
those conducting clinical trials would still be able to receive a cash refund
above $4 million.
4.84 The linking measure will reduce the level of benefit available to
profitable SMEs from 16 per cent to 13.5 per cent. However, this measure
is required to reset the level of benefit to that which was available prior to
the company tax cuts. Profitable SMEs have in the meantime been the
beneficiaries of an unintended windfall arising from this anomaly.
4.85 Unprofitable SMEs will see a reduction in their refundable
benefit of 2.5 per cent. This is an acknowledged policy consequence of the
linking measure, and provides a consistent level of benefit for both
profitable and unprofitable SMEs.
4.86 There are difficulties measuring the responsiveness of R&D
expenditure incurred by smaller claimants that would allow an assessment
of the likely impact of the measure on the aggregate level of R&D. While
the level of benefit is being slightly reduced, the equivalent reduction in
company tax rates will have more widespread positive cash flow
consequences. Given the two policies will be implemented over a similar
period, future analysis is also unlikely to be able to clearly disaggregate
the effects of these two policies.
4.87 Given the changes being made to the program, the feedstock,
clawback and balancing adjustment rules would need to be amended to
ensure they correctly reverse the tax benefit of claiming R&D in situations
such as where the R&D activities are funded by other forms of
government support or the results of R&D activities are sold. This may
result in some transitional costs for taxpayers already claiming under the
program.
4.88 It is expected that the regulatory impact of the changes would be
moderate. The intensity calculation for companies receiving the non-
refundable offset would use information from existing tax return labels.
As companies already collect the required information, making an
additional calculation would impose limited additional costs. The
introduction of the cap on cash refunds is not expected to change the way
that companies would register or claim their R&D expenditure, except for
those claiming a clinical trials exemption.
4.89 Increased regulatory burdens would largely lie with companies
who would benefit under changes in the program. For example, the
companies in a position to benefit from the higher expenditure threshold
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
may choose to register additional R&D activities in order to maximise
their benefits under the program.
Option 3 - Net benefit
4.90 The net result is that the R&DTI would be more focused towards
supporting additional high intensity R&D expenditure, reducing support
for activities likely to be business-as-usual and improving the returns to
the economy and to taxpayers. The changes help reduce the cost of the
program, delivering an estimated gain to the budget of $1.8 billion over
the current forward estimates period in fiscal balance terms.
4.91 Under Option 3, the regulatory burden is higher than for Option
2, however this is due to retained access for all non-refundable claimants.
These companies would still be able to access a baseline level of support
even if their R&D intensity is less than one or two per cent. These lower
intensity companies are excluded under Option 2, and so reduce the
associated regulatory costs under that option.
4.92 The targeted reforms to the R&DTI would have minimal
regulatory impact on program participants and the reforms do not exclude
any companies from claiming under the R&DTI. Minor changes would be
required to the registration and claims processes as a result of the changes.
Record keeping requirements would remain largely unchanged, and
information required to calculate a company's intensity (e.g. total
expenses) is already available as part of the company tax return process.
Accordingly, only a minor increase in compliance costs is expected.
4.93 The potential for companies to establish specific R&D entities
for the purpose of accessing the higher R&D intensity benefits was
considered during the legislation consultation process. Following
stakeholder feedback, it was considered that the risk of this occurring is
manageable and the ATO has advised that the anti-avoidance provisions
in the tax law, which are being strengthened as part of this legislative
package, may apply to such schemes.
4.94 This option would result in an estimated total average annual
regulatory cost for businesses of $26.3 million:
Table 4.5: Regulatory burden estimate (RBE) table (Option 3)
Average annual regulatory costs (from business-as-usual)
Change in costs Business Community Individuals Total change in
($ million) organisations cost
Total, by sector $26.3 Nil Nil $26.3
*Average annual impact (calculated over 10 years).
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Regulation impact statement
Consultation plan
4.95 There has been significant consultation on the reforms to the
R&DTI.
4.96 The first round of public consultation occurred during the
Review of the R&DTI in early 2016. To inform their deliberations, the
Review Panel conducted a program of targeted consultations with a
variety of stakeholders including those from industry, the research sector,
and government and tax agents. The Review consultation period began on
13 January 2016 and ended on 18 March 2016.
4.97 The Review was released publicly on 28 September 2016. To
inform its response to the Review's recommendations, the Government
announced a four week public consultation period, which was undertaken
following the public release of the Review report. In addition to written
submissions, the then Minister for Industry, Innovation and Science
convened a number of roundtables with peak industry bodies, and one-on-
one meetings with targeted stakeholders and DIIS conducted multiple
stakeholder forums in all states and territories to receive feedback. The
written submissions are publicly available on the DIIS website at
industry.gov.au.
4.98 Following the Government's announcement of reforms in the
context of the 2018-19 Budget, draft legislation was released for public
consultation from 29 June to 26 July 2018. In addition to written
submissions, consultations included a series of face-to-face meetings with
key stakeholders conducted by DIIS in consultation with the Treasury and
the ATO. Consistent with the prior consultation processes, some
stakeholders objected to the potential reduction of benefits under the
proposed changes. However in general, feedback from this process helped
refine the legislation with the following stakeholder suggestions being
adopted:
• amending the 'R&D premium' so that it is calculated as a
portion of 'total expenses' and not 'total expenditure'.
Stakeholders argued this would be easier to comply with as
the information is more readily available in their accounting
systems;
• clarified the scope of the clinical trial exemption to remove
ambiguity;
• expanded the new mechanism for working out clawback and
feedstock adjustments to include balancing adjustments for
R&D assets, meaning a single mechanism is used for
adjustments to the amounts of benefit received under the
Incentive;
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
• excluded clawback amounts from the income tests that apply
to early stage investment companies (ESICs), to ensure the
Incentive does not inadvertently impact eligibility for other
Government programs; and
• explicitly legislated a minimum 2 year delay for the ATO
publishing R&DTI claimant details to help alleviate
stakeholder concerns that data published soon after year end
could be commercially sensitive in nature.
4.99 Following its introduction to Parliament, the legislation was
referred to the Senate Economics Legislation Committee for review. The
Committee received 75 written submissions and held three public hearings
between 16 November 2018 and 31 January 2019. The Committee
released its report on 11 February 2019. Further refinements to the
legislation have been made with the recommendations of the report in
mind, including a delay to the start date of the legislation to 1 July 2019
and the increased rate and changes to the calculation of the R&D
Premium.
4.100 In addition to the above formal consultations, the Minister for
Industry, Science and Technology and DIIS and the ATO have continued
to engage with stakeholders (for example, through face to face meetings,
roundtables and teleconferences), and will continue to do so throughout
implementation of the reforms.
Option selection/conclusion
4.101 The preferred policy option is to implement the targeted reforms
to the R&DTI (Option 3). Option 3 would better target the R&DTI by
inducing greater additionality and spillovers, while improving the
integrity of the program. Option 3 addresses the issues raised in the
Review and provides a greater incentive to high R&D intensity companies
than that recommended by the Review (Option 2). Option 3 implements a
larger annual cap on cash refunds and provides a minimum base rate of
support for claimants with low R&D intensity.
4.102 Although Option 3 is expected to result in higher regulatory
costs, it continues to provide support to companies that would be
completely excluded from the program under Option 2. It also addresses
the policy concerns with the current program, which would have persisted
under Option 1. It is therefore the preferred approach to reform the
R&DTI.
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Regulation impact statement
Implementation and evaluation/review
4.103 Legislation is required to implement this proposal. The reforms
to the R&DTI will apply for income years commencing on or after 1 July
2019. As such, legislation will need to be passed by 30 June 2020 as the
measures apply to the 2019-20 year.
4.104 To support R&DTI claimants in understanding their obligations
under the reformed program, the ATO and AusIndustry will issue
improved guidance products for claimants. This will be augmented by the
proposed changes that permit ISA to issue binding public guidance,
increasing certainty for claimant's as to what is and is not eligible R&D
activity under the R&DTI. Additional resourcing for the regulators is also
being used to undertake greater enforcement activity, further improving
the integrity of the R&DTI.
4.105 Following the passage of the legislation, the ATO and ISA will
continue to undertake their client feedback processes, which assist in
identifying opportunities to improve the administration of the R&DTI.
Treasury and DIIS will also consider feedback from regulators and
stakeholders as to how the reformed R&DTI is operating in practice.
4.106 Following the end of a financial year, there is a 16 month delay
before complete registration and taxation data for that years' R&DTI
registrants becomes available. This time lag means that analysing
companies' behavioural responses to the proposed measures would not be
possible for some time (late 2021 at the earliest). This is because a number
of years of data from the reformed program would be necessary to
perform a useful evaluation of the effects of any changes. Accordingly,
any review performed before 2023/24 would be of limited value as the
dataset would not cover a sufficient period.
4.107 Evaluations for the R&DTI are performed in consultation with
DIIS's internal evaluation unit, and the results are made public at
Ministerial discretion.
4.108 As discussed earlier in this document, there are longstanding
challenges in evaluating program effectiveness against its objectives of
additionality and spillovers. To again quote the CIE:
... there are significant difficulties in measuring additionality and
spillovers arising from the R&D TI. This means that a sound quantitative
estimate of the overall benefits of the scheme to the economy (or an
estimate of the value that the taxpayer receives for their expenditure) will
always be subject to considerable uncertainty.
4.109 It is not expected that the reformed program will assist in
overcoming these data issues.
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Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019
4.110 General summaries of Government support provided for
business R&D will continue to be published publicly in the annual
Science, Research and Innovation Budget Tables. In addition, the reforms
to the R&DTI will ensure transparency of the program by publishing the
names of companies, and their claim amounts, following a two year delay.
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Chapter 5
Statement of Compatibility with Human
Rights
Prepared in accordance with Part 3 of the Human Rights
(Parliamentary Scrutiny) Act 2011
Better targeting the Research and Development Tax Incentive
5.1 The Bill is compatible with the human rights and freedoms
recognised or declared in the international instruments listed in section 3
of the Human Rights (Parliamentary Scrutiny) Act 2011.
Overview
5.2 Schedule 1 to the Bill reforms the R&D Tax Incentive to better
target the program, and improve its effectiveness and integrity.
5.3 Schedule 2 to the Bill enhances the integrity of the Incentive by
ensuring R&D entities cannot obtain inappropriate tax benefits and by
clawing back the benefit of the Incentive to the extent an entity has
received another benefit in connection with an R&D activity.
5.4 Schedule 3 to the Bill improves the administrative framework
supporting the Incentive by making information about R&D expenditure
claims transparent, enhancing the guidance framework to provide
certainty to applicants and streamlining administrative processes.
Human rights implications
5.5 The Bill does not engage any of the applicable rights or
freedoms. The amendments in the Bill only applies to bodies corporate.
Conclusion
5.6 The Bill is compatible with human rights as it does not raise any
human rights issues.
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