The legislation to enact the new Research and Development Tax Incentive (‘Tax Incentive’) has received Royal Assent and is effective from 1 July 2011. The Tax Incentive replaces the previous Research and Development Tax Concession (‘Tax Concession’) that continues to apply prior to 1 July 2011.
The first year of the Tax Incentive is the year ending 30 June 2012. Current claims for the year ended 30 June 2011 continue to be made under the Tax Concession.
The Tax Incentive is available to companies that are Australian residents for tax purposes, as well as foreign companies that carry on research and development activities through a permanent establishment in Australia. Certain public trading trusts with a corporate trustee may also be eligible.
The Tax Incentive contains the following two forms of tax offsets:
- Non-refundable40 per cent tax offset (equivalent to a 133 per cent tax deduction) which can be carried forward
- Refundable 45 per cent tax offset (equivalent to a 150 per cent tax deduction) for companies with a group turnover of lessthan $20 million.
Through the availability of these higher tax offsets, the Tax Incentive is aimed at encouraging a greater number of companies to engage in research and development activities.
These tax offsets apply to expenditure on eligible research and development activities and depreciation of assets used in conducting such activities. Eligible research and development activities are categorised as either core or supporting activities.
Core research and development activities are experimental activities undertaken in order to gain new information or knowledge. Some activities are specifically excluded from being core research and development activities. These include market research, sales promotion, quality control and prospecting or drilling for minerals or petroleum for specified purposes.
Supporting research and development activities are activities directly related to, or undertaken for the dominant purpose of supporting, core research and development activities.
Generally, these activities must be undertaken in Australia; however, activities undertaken overseas may be eligible in limited circumstances where they cannot be conducted in Australia. Such circumstances include where there are physical limitations, there is a significant link to core research and development activities conducted in Australia or the overseas expenditure is less than that incurred on Australian activities.
The tax offsets are not subject to the previous $2 million expenditure cap and the minimum expenditure threshold of $20,000 continues to apply.
Other aspects, such as administration and compliance activities remain the same under the Tax Incentive. In particular, companies must still register their activities annually within 10 months after the end of their financial year.
Businesses that conduct research and development activities should consider these new tax offsets to determine any impact they may have on their accounting, information and record-keeping systems from 1 July 2011.