R&D tax amendments mixed news for small business

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R&D tax amendments

Mixed news for small business

11 February 2015: The Senate has this week agreed to amendments to the Tax Laws Amendment (Research and Development) Bill 2013 as suggested by the Palmer United Party. The amendments replace a proposed $20bn threshold measure with an annual expenditure cap of $100m per claimant with effect from 1 July 2014 for 10 years. It is also expected this agreement will supersede the proposed 1.5% reduction in the rate of R&D tax offsets.

Serg Duchini, Deloitte Australia National R&D Tax Leader, comments: “A number of problems with the new measures remain, including the retrospective nature of the amendments. Companies will have already committed to a number of R&D projects currently underway and these measures may now affect their financial viability at a very late stage. Deloitte believes a start date of 1 July 2015 would have been better practice.

“The new measures will also affect a wider range of sectors, other than banking and mining, including those which currently employ large numbers of research staff and especially those businesses within the pharmaceutical and health care sectors. This increases the potential to deter R&D investment in Australia by large companies which have the ability to conduct R&D offshore in countries with more attractive tax incentives. The certainty of a 10 year sunset period will be insufficient to encourage companies to retain their R&D in Australia during that period, and once offshored, it may be difficult to tempt the R&D back to Australia.

“Unfortunately, there appears to have been little consideration to the supply chain impacts and the inevitable flow on consequences for smaller businesses based in Australia that often undertake collaborative R&D activities for larger companies. The missed opportunity for small business with the Senate rejecting the Australian Greens amendment to reintroduce the proposed quarterly refundable credit legislation is also disappointing – this would have enhanced the effectiveness of the incentive for smaller innovators.

“Should the cut in the company income tax rate be reduced for small business to 28.5%, this will represent a welcome increase in the net tax R&D benefit to 11.5% or 16.5% for small and medium sized companies depending on the rate of company income tax and the R&D tax offset rate they are entitled to.”

However, according to Duchini the rejection of the long proposed income threshold measure is welcome. He adds: “Given the Government is intent on passing a savings measure in this area, an expenditure cap is more in line with some international practice. As yet specific modelling of the effect of the amendments has not been seen.

“Overall, the timing of any amendments is unusual given the proposed review of Australia’s innovation policy is in progress. Our preference would have been to defer any piecemeal changes for a more holistic review of support for Australian innovators.”

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