Federal Budget 2018 – R&D tax incentive changes are a handbrake on innovation

Businesses of all sizes need to follow new steps to claim the R&D tax offset, and there’s a cap for smaller businesses.

The big change is how the rebate is now split between bigger businesses and smaller businesses. Smaller businesses are limited to $4 million on their R&D tax offset claims.

“If we have one issue with this budget it’s our concern about the government’s decision to cap the R&D tax incentive. This will cap creativity and innovation, discouraging investment and growth in the critical startup ecosystem, and for small businesses more broadly,” MYOB CEO Tim Reed said.

“While it’s important to ensure investment is channeled correctly, we know that Australian businesses spend less than two percent of GDP on R&D. This isn’t enough to drive an innovative and globally competitive future.”

“It seems odd to limit this measure when there is wide agreement that we need to lift business investment.”

So, what exactly is changing?

The first step is that the flat 43.5 percent refundable tax offset for smaller businesses has gone. The 38.5 percent non-refundable tax offset for all other applicable businesses is no more. The tax offset rate now depends on how much a company spends as a proportion of its overall expenditure.

This all depends on the size of the company claiming the offset.

For companies over $20 million

The R&D offset will tie the rate of offset to how much a company spends as a proportion of its overall expenditure.

• For companies spending 0–2 percent of its overall expenditure on R&D, they can claim a rebate of 4 percentage points above the marginal company tax rate.
• This rises to 6.5 points for between 2–5 percent of overall spending, 9 points for 5–10 percent and 12 points for 10 percent and above.
• The maximum amount of R&D spending to be offset will rise from $100 million to $150 million.

For companies $20 million and under

• The offset is a premium of 13.5 percentage points above a claimant’s company tax rate.
• Cash refunds are capped at $4 million per year.
• Offsets that can’t be refunded will be carried forwarded as non-refundable tax offsets
• The government has also signalled that it will be cracking down on businesses making fraudulent R&D claims.

What does this mean for my business?

If you’re in the business of R&D, this will stir up the way you do things.

You’ll need to step up your efforts into calculating your R&D investment as a proportion of your overall spending, which means more rigorous reporting and documentation.

If you’re expecting a certain return based on the current offset, you may need to rethink your plans.