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The R&D Tax Incentive is cut by half

In the Budget we got the following announcement…

From 1 July 2018, companies with turnover of $20 million or more, the rate of the R&D tax offset will depend on the R&D expenditure as a proportion of total expenditure for the year.

The current rate for these entities is 38.5%. As the company tax rate for these guys is generally 30% the actual tax saving is 8.5% of R&D expenditure… but now:

  • If less than 2% of an entity’s expenses are R&D expenses, the rate will be 34% (or a 4% benefit);
  • If between 2% and 5% of an entity’s expenses are R&D expenses, the rate will be 36.5%;
  • If between 5% and 10% of an entity’s expenses are R&D expenses, the rate will be 39%; and
  • If more than 10% of an entity’s expenses are R&D expenses, the rate will be 42.5%

This all assumes the company has a tax rate of 30%. If the tax rate is 27.5% all these rates are reduced by 2.5%.

As you can see, if your R&D spend is less than 5% of the company’s total spend this is a substantial reduction in the offset. If the R&D spend is less than 2% of the company’s total spend, the benefit of claiming the R&D Tax Incentive falls to just 4% of the amount the company claims.

But the costing show how few companies spend more than 2% of their expenditure on R&D. The most recent Tax Expenditure Statement that came out two months ago say that the cost of providing the R&D Tax Incentive is a loss of $720 million in tax each year.

The budget costing say this change will increase taxes by between $305million and $395 million a year.

This means these changes reduce the amount handed out through this incentive by half… ouch

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Remember that if you don’t like this budget there is an alternative… The Opposition…

The facts…

A taxpayer has a discretionary trust and the trust owns a share in a company that runs an accounting practice. The taxpayer is paid a salary of $250,000 for his work in the accounting practice. The profits of the company are paid to the discretionary trust and are generally around $60,000 but this is distributed to the taxpayer’s spouse and two adult kids at University.

The taxpayer also owns a series of rental properties that are negatively geared with losses of $60,000. The taxpayer sold one of the properties and made a gain of $100,000.

The taxpayer has an SMSF. As the taxpayer has substantial property holdings outside super they hold only listed shares in the SMSF. The fund has $1 million in listed share, returning $50,000 of fully franked dividends. The taxpayer makes a $25,000 deductible super contribution each year.

The taxpayer pays $5,000 for personal tax advice and lodging their return.

The effect if at the next election we get el Presidente Shorten…

The $60,000 profit paid to the discretionary trust was distributed $20,000 to the spouse and the children. Each would pay (almost) no tax now, but under the new tax arrangement proposed by the Opposition the Discretionary Trust Distribution Minimum Tax would apply 30% ($18,000).

$18,000 more Tax

The tax on the $250,000 salary will be increased by the Opposition from 47% to 49%, which is an increase of 2%. But in addition, under the Opposition’s announcements, the taxpayer is denied $2,000 of deductions for tax advice, $25,000 of deductions of super contributions and $60,000 from the losses on the rental properties.

Before these changes, the taxable income was $163,000 ($250,000 – $60,000 – $25,000 – $2,000) but now the taxable income is $250,000. The tax was about $47,000 but it rises to over $87,000.

$40,000 more tax

The sale of the shares for the capital gain of $100,000 was reduced to $50,000 and was (mostly) taxed at 47% so the tax was a bit less than $23,000. But now as the Opposition is reducing the CGT discount from 50% to 25%, the gain is only reduced to $75,000 with tax of $36,750

$14,000 more tax

Finally, under the Opposition’s announcements, the SMSF will lose its refundable tax credits of $15,000 each year.

$15,000 more tax

Total – $87,000 more tax each year

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Beer, Tax Cuts and Fairness

Sent this into a newspaper that will be screaming about unfair tax cuts tomorrow. Let’s see if they publish it. UPDATE… They did (it’s near the bottom of the page – https://www.canberratimes.com.au/national/act/roos-are-a-capital-asset-20180509-p4zecz.html)

Five men decided to split the $100 beer tab based what they earn (one in each 20% grouping based on income) and on the Aussie tax system.

That meant the first paid $0, the second paid $2, the third and fourth paid $14 each, and the fourth paid $70.

The bar owner gave them a $20 refund and based it on what they had paid already.

Therefore, the first got no refund, the second got 40 cents, the third and fourth got $2.4 and the fifth got just under $15.

The media ran headline saying how the refund was inappropriately skewed to the rich and how the refund should be split $4 each. Which is the fairest way to split a refund of this beer tab… or a tax reduction?