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THE NEW R&D TAX INCENTIVE Implications and impacts for your business NICOLA PURSER & RAY FORRESTER 8 September 2011 Nicola PurserRay Forrester Partner,

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Presentation on theme: "THE NEW R&D TAX INCENTIVE Implications and impacts for your business NICOLA PURSER & RAY FORRESTER 8 September 2011 Nicola PurserRay Forrester Partner,"— Presentation transcript:

1 THE NEW R&D TAX INCENTIVE Implications and impacts for your business NICOLA PURSER & RAY FORRESTER 8 September 2011 Nicola PurserRay Forrester Partner, R&D Tax Incentives Senior Manager, R&D Tax Incentives (07) (07)

2 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 Incentive Implications & impacts for your business Government Rationale

3 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 Incentive Implications & impacts for your business Designing a regime

4 THE NEW R&D TAX INCENTIVE Key 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 The New R&D Tax Incentive Implications & impacts for your business

5 THE NEW R&D TAX INCENTIVE Key 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 Incentive Implications & impacts for your business

6 THE NEW R&D TAX INCENTIVE Key aspects and changes - Tax benefit The New R&D Tax Incentive Implications & impacts for your business R&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 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)

7 THE NEW R&D TAX INCENTIVE Comparison of tax benefit (40% non-refundable) The New R&D Tax Incentive Implications & impacts for your business R&D TAX CONCESSION NEW R&D TAX INCENTIVE Income$25,000,000Income$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$3,000,000Taxable income$4,250,000 Tax payable at 30%$900,000Tax payable at 30%$1,275,000 Tax offset ($1m x 40%)($400,000) Net tax payable$900,000Net tax payable$875,000 Benefit ($250k x 30%)$75,000Benefit ($1m x 10%)$100,000

8 THE NEW R&D TAX INCENTIVE Comparison of tax benefit (45% refundable) The New R&D Tax Incentive Implications & impacts for your business R&D TAX CONCESSION NEW R&D TAX INCENTIVE Income$5,000,000Income$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%NilTax 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

9 THE NEW R&D TAX INCENTIVE Definition – Core R&D activities R&D TAX CONCESSION NEW 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 Incentive Implications & impacts for your business

10 THE NEW R&D TAX INCENTIVE Definition - 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 Incentive Implications & impacts for your business

11 THE NEW R&D TAX INCENTIVE Definition – Supporting R&D activities R&D TAX CONCESSION NEW R&D TAX INCENTIVE Supporting 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 Incentive Implications & impacts for your business

12 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 Incentive Implications & impacts for your business Case study – Deep Cycle Batteries Pty Ltd (DCB)

13 THE NEW R&D TAX INCENTIVE Case study – DCB production trial The New R&D Tax Incentive Implications & impacts for your business Supporting Core Supporting $240k trial expenditure $40k trial expenditure

14 THE NEW R&D TAX INCENTIVE Case 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 Incentive Implications & impacts for your business

15 THE NEW R&D TAX INCENTIVE Compliance 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 Incentive Implications & impacts for your business

16 THE NEW R&D TAX INCENTIVE Compliance 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 The New R&D Tax Incentive Implications & impacts for your business

17 WHERE TO FROM HERE? The New R&D Tax Incentive Implications & impacts for your business Planning

18 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 Incentive Implications & impacts for your business Further information

19 QUESTIONS... Implications & impacts for your business Nicola PurserRay Forrester Partner, R&D Tax Incentives Senior Manager, R&D Tax Incentives (07) (07) THE NEW R&D TAX INCENTIVE


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