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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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
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