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By Peter Hill
Australian Federal Treasurer Scott Morrison announced May 8 a sweeping reform of the research and development tax incentive, part of a push to spur large companies to invest in R&D.
The proposal was among measures included in the 2018-19 budget. The proposal includes a new “research and development premium” for companies with annual turnover of A$20 million ($14.9 million) or more. The premium will take effect July 1 and “will provide multiple rates of non-refundable R&D tax offsets, increasing with the intensity of the claimant’s incremental R&D expenditure,” according to the government.
For large companies, “stronger incentives are required for them to increase their overall R&D intensity,” the government said. Morrison also announced a range of compliance, enforcement, and administration changes to improve the integrity of the tax incentive.
The government expects the measures to provide a net gain “of around A$2 billion” over the four-year forward estimate period.
In his budget speech in Parliament May 8, Morrison said “to support companies genuinely investing in research and development, we are refocusing the R&D tax incentive to give more support to the companies that invest a higher proportion of what they spend in R&D, over and above what others would just do anyway.”
The reform of the R&D tax offset is the government’s response to the 2016 review of the incentive chaired by Bill Ferris of the independent but government-established Innovation Australia, which found it wasn’t meeting its stated policy objectives.
At the time, the R&D tax offset was costing the government around A$3 billion a year.
The review also found that it was larger companies with higher R&D intensity that were providing the greatest benefits to the Australian economy.
The new rates for large companies will provide R&D tax offsets of between 4 and 12.5 percentage points on top of the company’s tax rate, with the maximum kicking in when R&D expenditure exceeds a 10 percent intensity rating. The corporate tax rate in Australia is 30 percent.
According to the government, it developed the new research and development premium “in recognition that many larger companies undertake research and development and that this should be afforded a baseline level of support, but stronger incentives are required for them to increase their overall R&D intensity.”
The government also increased the annual limit of R&D spending from A$100 million to $150 million starting July 1.
From the same date, companies with less than A$20 million in annual turnover will be hit with a A$4 million annual cap on cash refunds, according to the government. Any excess will become a non-refundable tax offset for use in future years.
Morrison also announced two integrity measures designed to impact multinational groups with Australian operations.
The government expanded a definition of “significant global entity” (SGE) to capture members of large multinational groups headed by private companies, trusts, partnerships, and investment entities. The broader definition applies beginning July 1 and will help “ensure that Australia’s multinational tax integrity rules operate as intended,” the government said.
They also will ensure the Australian Tax Office’s power to treat a given entity as an SGE parent entity that operates as intended. SGEs are required to prepare country-by-country reports and are potentially subject to Australia’s multi-national anti-avoidance law and the newer diverted profits tax regime.
Beginning July 1, 2019, asset values as stated in financial statements must be the same values for thin capitalization purposes. Valuations made prior to the treasurer’s announcement can be relied upon until then.
The government said the measure “will ensure that asset valuations used to justify debt deductions are robust.”
In addition, a change estimated to benefit the government A$240 million over the four-year estimate period would treat foreign-controlled Australian consolidated groups as both outward and inward investment vehicles for thin capitalization purposes, preventing inbound foreign investors accessing tests “that were only intended for outward investors, the government said.
Reforms included in the proposal will take effect July 1. The government will publish the names of companies claiming the R&D tax offset and the amounts of spending they have claimed. The government will also focus on “strengthening anti-avoidance rules” and add additional resources to ensure ineligible R&D claims are denied.
“We are cracking down to ensure that the R&D tax incentives are used for their proper purpose, with enhanced integrity, enforcement and transparency arrangements, saving taxpayers A$2 billion over the next four years,” Morrison said in his speech.
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