The New R&D Tax Incentive

THE NEW R&D TAX INCENTIVETHE NEW R&D TAX INCENTIVE

Implications and impacts for your businessImplications and impacts for your businessNICOLA PURSER & RAY FORRESTERNICOLA PURSER & RAY FORRESTER8 September 20118 September 2011

Nicola Purser Ray ForresterPartner, R&D Tax Incentives Senior Manager, R&D Tax Incentives(07) 3237 5648 (07) 3237 [email protected] [email protected]

R&D INCENTIVES

Technological innovation is a major driver of economic growth

Companies will not spend the optimal amount on R&D without government support as the returns do not justify that level of spending

The social benefits of R&D spending exceed those accruing to the firm that is investing in R&D

To influence R&D performers either to locate their activities within the country or at least to stop research jobs from leaving the country.

The New R&D Tax IncentiveImplications & impacts for your business

Government Rationale

R&D INCENTIVES

What is the rate of the concession or offset on an after-tax basis?

Is all or a portion of the offset refundable?

What types of activities qualify?

Are there any territorial limits?

Is the system volume based or incremental, or a mixture of both?

What types of expenditures qualify?

What is the lodgement deadline and how much substantiation is required?

What is the likelihood of obtaining the offset once lodged and what is the audit process?


Designing a regime

THE NEW R&D TAX INCENTIVEKey aspects and changes Applies for income years beginning on or after 1 July 2011

Rules contained in a new Division 355 of the Income Tax Assessment Act 1997

Repeals sections 73B to 73Z of the Income Tax Assessment Act 1936

Administrative rules in a new Part III of the Industry Research and Development Act 1986.


THE NEW R&D TAX INCENTIVEKey aspects and changes Calculation of tax benefit (deduction to tax offset)

New definition of R&D activities

Compliance and administration changes

Other changes

PEs of foreign corporations now eligible Adjustment to assessable income for feedstock expenditure Adjustment to assessable income for grant funding (clawback) Additional scope to claim R&D activities conducted overseas.


THE NEW R&D TAX INCENTIVEKey aspects and changes - Tax benefit


R&D TAX CONCESSIONR&D TAX CONCESSION

125% R&D tax concession (an additional tax deduction of 7.5 cents per dollar spent on R&D)

Refundable tax offset (37.5 cents per dollar for companies with turnover <$5 million and expenditure between $20,000 and $2 million)

175% premium concession (an additional 15 cents per dollar spent on R&D above a company’s 3 year average)

NEW R&D TAX INCENTIVENEW R&D TAX INCENTIVE

45% refundable tax offset for businesses with a turnover less than $20 million (a benefit of 15 cents per dollar spent on R&D at a 30% company tax rate)

40% non-refundable tax offset for all other eligible businesses (a benefit of 10 cents per dollar spent on R&D at a 30% company tax rate)

THE NEW R&D TAX INCENTIVEComparison of tax benefit (40% non-refundable)


R&D TAX CONCESSIONR&D TAX CONCESSION NEW R&D TAX INCENTIVENEW R&D TAX INCENTIVE

Income $25,000,000 Income $25,000,000

R&D deductions (100%)

($1,000,000)

R&D additional 25% ($250,000)

Other deductions ($20,750,000)

Other deductions ($20,750,000)

Taxable income $3,000,000 Taxable income $4,250,000

Tax payable at 30% $900,000 Tax payable at 30% $1,275,000

Tax offset ($1m x 40%)

($400,000)

Net tax payable $900,000 Net tax payable $875,000

Benefit ($250k x 30%)

$75,000 Benefit ($1m x 10%) $100,000

THE NEW R&D TAX INCENTIVEComparison of tax benefit (45% refundable)



Income $5,000,000 Income $5,000,000

R&D deductions (100%)

($1,000,000)

R&D additional 25% ($250,000)

Other deductions ($5,750,000) Other deductions ($5,750,000)

Tax loss ($2,000,000)

Tax loss ($750,000)

Tax payable at 30% Nil Tax payable at 30% Nil

Tax offset ($1m x 45%)

$450,000

Cash refund $450,000

Additional tax loss

($75,000) Permanent tax benefit

$150,000

THE NEW R&D TAX INCENTIVEDefinition – Core R&D activities


Core (SIE) R&D activities:

Systematic, investigative and experimental (SIE) High levels of technical risk or innovation Acquiring new knowledge; or Creating new or improved materials, products, devices, processes or services

Core R&D activities:

Experimental activities Outcome cannot be determined in advance Based on principles of established science Generating new knowledge (including new or improved materials, products, devices, processes or services)


THE NEW R&D TAX INCENTIVEDefinition - Core R&D activities

‘Exclusions list’ - certain activities continue to be excluded from being core

market research, testing or development, or sales promotion prospecting, exploring or drilling for minerals or petroleum commercial, legal and administrative aspects of patenting/licensing management studies, efficiency surveys complying with statutory requirements/standards reproduction of commercial product/process research in social sciences, arts or humanities in-house software development for the dominant purpose of internal

business administration.


THE NEW R&D TAX INCENTIVEDefinition – Supporting R&D activities

R&D TAX CONCESSIONR&D TAX CONCESSION NEW R&D TAX INCENTIVENEW R&D TAX INCENTIVESupporting R&D activities:

a purpose directly related to core R&D

Supporting R&D activities:

directly related to core R&D

Production activities:

Can be supporting R&D activities

Production activities:

Can be supporting R&D activities Only if undertaken for dominant purpose of supporting core R&D

Exclusions list:

Can qualify as supporting R&D activities

Exclusions list:

Can be supporting R&D activities Only if undertaken for dominant purpose of supporting core R&D


THE NEW R&D TAX INCENTIVE

Case study

Deep Cycle Batteries Pty Ltd

Deep Cycle Batteries Pty Ltd (‘DCB’) is a manufacturer of automotive lead-acid batteries in Australia

Experimenting with recycled lead for use in battery manufacturing Significant technical concern that use of recycled lead will impact on

production throughput objectives Production trial required to resolve technical uncertainty.


Case study – Deep Cycle Batteries Pty Ltd (DCB)

THE NEW R&D TAX INCENTIVECase study – DCB production trial


Supporting CoreSupporting Supporting

$240k trial expenditure

$40k trial expenditure

THE NEW R&D TAX INCENTIVECase study – DCB production trial Key question: How does DCB satisfy dominant purpose test if

production activities ultimately result in saleable products? Factors that may support dominant purpose position include:

Additional monitoring, record keeping and output inspections The extent of potential disruption to normal production activities The risk that production outcomes will be compromised Other points of differentiation between the trial production run and

normal operational activities Documentation likely to be key in maintaining all trial costs as eligible

R&D Technical objectives and scope of trial Documentation of trial risks Recording of trial results and conclusions.The New R&D Tax IncentiveImplications & impacts for your business

THE NEW R&D TAX INCENTIVECompliance and administration Advance findings

An R&D entity can request a finding about the nature of activities (ie core or supporting) before it is possible to register the activities (or before undertaking the activities)

Advance finding is binding on the Commissioner May be appropriate for large projects where certainty around

eligibility is important (eg where incentive has significant impact on financial modelling)

R&D plans and record keeping

No longer statutory requirement for an R&D project plan However, similar documentation still required to support activities

eligibility


THE NEW R&D TAX INCENTIVECompliance and administration R&D application form

No change to lodgement deadline (10 months after tax year end) More onerous ‘self-assessment’ registration regime Separate out core and supporting R&D activities in the R&D

application form and identify costs attributed to each Project versus activity costing? Pressure on AusIndustry to reduce compliance burden.

Quarterly payments

Potential for quarterly payments for SMEs from 2014.


WHERE TO FROM HERE?


Planning

WHERE TO FROM HERE?

AusIndustry half-day briefing - 20 Sept in Brisbane

"R&D Tax Incentive Guidance Discussion Paper" - late October 2011

Ask us

Meeting with key AusIndustry personnel

Meeting with Sophie Mirabella, Shadow Minster for Industry, Innovation and Science.


Further information

QUESTIONS...QUESTIONS...

Implications & impacts for your businessImplications & impacts for your business

Nicola Purser Ray ForresterPartner, R&D Tax Incentives Senior Manager, R&D Tax Incentives(07) 3237 5648 (07) 3237 [email protected] [email protected]

THE NEW R&D TAX INCENTIVETHE NEW R&D TAX INCENTIVE

Documents

The New R&D Tax Incentive