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The New R&D Tax Incentive. Implications and impacts for your business. Nicola Purser & Ray Forrester. 8 September 2011. R&D Incentives. Government Rationale. Technological innovation is a major driver of economic growth - PowerPoint PPT Presentation
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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 5950nicola.purser@bdo.com.au ray.forrester@bdo.com.au
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?
The New R&D Tax IncentiveImplications & impacts for your business
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 IncentiveImplications & impacts for your business
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 IncentiveImplications & impacts for your business
THE NEW R&D TAX INCENTIVEKey aspects and changes - Tax benefit
The New R&D Tax IncentiveImplications & impacts for your business
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)
The New R&D Tax IncentiveImplications & impacts for your business
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)
The New R&D Tax IncentiveImplications & impacts for your business
R&D TAX CONCESSIONR&D TAX CONCESSION NEW R&D TAX INCENTIVENEW R&D TAX INCENTIVE
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
R&D TAX CONCESSIONR&D TAX CONCESSION NEW R&D TAX INCENTIVENEW R&D TAX INCENTIVE
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 IncentiveImplications & impacts for your business
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 IncentiveImplications & impacts for your business
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 IncentiveImplications & impacts for your business
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.
The New R&D Tax IncentiveImplications & impacts for your business
Case study – Deep Cycle Batteries Pty Ltd (DCB)
THE NEW R&D TAX INCENTIVECase study – DCB production trial
The New R&D Tax IncentiveImplications & impacts for your business
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 IncentiveImplications & impacts for your business
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.
The New R&D Tax IncentiveImplications & impacts for your business
WHERE TO FROM HERE?
The New R&D Tax IncentiveImplications & impacts for your business
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.
The New R&D Tax IncentiveImplications & impacts for your business
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 5950nicola.purser@bdo.com.au ray.forrester@bdo.com.au
THE NEW R&D TAX INCENTIVETHE NEW R&D TAX INCENTIVE
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