Senate

Supplementary Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Glossary

The following abbreviations and acronyms are used throughout this supplementary explanatory memorandum.

General outline and financial impact

Amendments to the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010

Research and development tax offset: start date

The Tax Laws Amendment (Research and Development) Bill 2010 provides for a tax incentive, in the form of tax offsets, for eligible research and development (R&D) expenditure undertaken by R&D entities. As introduced, the R&D tax incentive would apply for income years commencing on or after 1 July 2010.

The amendments to the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010 defer the application of the R&D tax incentive to income years commencing on or after 1 July 2011.

The existing R&D Tax Concession therefore continues to apply to income years commencing prior to 1 July 2011.

Date of effect: The amendments take effect from 1 July 2011.

Proposal announced: The amendments were announced in the Deputy Prime Minister and Treasurer's and the Minister for Innovation, Industry, Science and Research's Joint Media Release No. 066 of 15 June 2011.

Financial impact: The amendments are expected to have an overall cost to Budget revenue over the forward estimates period of $40 million comprising:

Compliance cost impact: Nil.

Refundable research and development tax offset: quarterly credits

The Tax Laws Amendment (Research and Development) Bill 2010 provides for a refundable 45 per cent tax offset for eligible research and development (R&D) expenditure undertaken by R&D entities with an aggregated turnover for the income year of less than $20 million.

Further amendments to the Tax Laws Amendment (Research and Development) Bill 2010 provide for the making of regulations to enable an eligible R&D entity to, on application, effectively anticipate the refund expected from its refundable tax offset claim by receiving quarterly credits. It is envisaged that these credits will then be subject to a reconciliation with the entity's actual tax position upon assessment. This is likely to take the actual entitlement to a refundable tax offset into account, as well as the resulting excess that arises after applying the offset against the entity's basic tax liability.

The necessary regulations must be made before 1 January 2014, to enable quarterly credits to be available for the quarter commencing on that date.

Quarterly credits will enhance the benefit to eligible entities of a tax offset that is refundable, by providing more timely delivery of the incentive for conducting R&D.

Date of effect: The power to make regulations takes effect from 1 July 2011.

Proposal announced: The amendments were announced in the Deputy Prime Minister and Treasurer's and the Minister for Innovation, Industry, Science and Research's Joint Media Release No. 066 of 15 June 2011.

Financial impact: The measure will have a once-off cash timing impact on the Budget, arising from claims effectively being paid in an earlier year. The extent of this timing impact will depend on the regulations governing access to the quarterly credits regime.

Compliance cost impact: The amendments will provide a tax benefit above that of the R&D tax incentive itself and, as obtaining that benefit is voluntary, all associated compliance costs are also voluntarily incurred.

The compliance costs of choosing to apply for quarterly credits will depend on the final content of the regulations.  These costs will reduce as taxpayers become accustomed to the arrangements and adjust their practices.  The Government has provided the administrative agencies with additional funding to ensure that they are adequately resourced to support taxpayers through the transition to the new R&D tax incentive as a whole. 

Chapter 1 - Amendents to the Tax Laws Amendment (Research and Development) Bill 2010

Amendments 2 to 7 and 9 to 41 - deferral of start date

1.1 The Tax Laws Amendment (Research and Development) Bill 2010 (Bill) provides tax incentives, in the form of tax offsets, for eligible research and development (R&D) expenditure undertaken by R&D entities.

1.2 As introduced, the Bill would cause the new R&D tax incentive to replace the existing R&D Tax Concession for income years commencing on or after 1 July 2010.

1.3 The amendments defer the start date, such that the new R&D tax incentive replaces the existing R&D Tax Concession for income years commencing on or after 1 July 2011.

1.4 The existing R&D Tax Concession therefore continues to apply to income years commencing prior to 1 July 2011.

1.5 Accordingly, the amendments replace references in the Bill to 1 July 2010 with 1 July 2011, and references to 2010-11 are replaced with 2011-12.

Amendments 1 and 8 - quarterly credits

1.6 For eligible R&D expenditure undertaken by R&D entities with an aggregated turnover for the income year of less than $20 million, the tax offset provided by the Bill is refundable.

1.7 The amendments provide for the making of regulations to enable an eligible R&D entity to, on application, effectively anticipate the refund expected from its refundable tax offset by receiving quarterly credits, if particular requirements are satisfied.

1.8 It is envisaged that these credits will then be subject to a reconciliation with the entity's actual entitlement to a refundable tax offset against the entity's basic tax liability.

1.9 The necessary regulations are to be made before 1 January 2014, to enable quarterly credits to be available for the quarter commencing on that date.

Quarterly credits to be implemented through regulations

1.10 The quarterly credits regime is to be implemented through regulations made for the purpose of achieving the objectives specified below. [ Amendment 8, Schedule 3A, subitem 2(1 )]

1.11 The precise rules governing whether and how a particular R&D entity will be able to receive quarterly credits, and the most efficient and effective means of providing quarterly credits in general, will be determined in the light of experience with the operation of the new R&D tax incentive.

1.12 Consequently, it is not feasible to include those details in these amendments. However, the amendments make it clear that a quarterly credits regime is to be a part of the new R&D tax incentive.

1.13 The regulations will modify one or more of the following 'relevant Acts':

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Income Tax Assessment Act 1936 (ITAA 1936);

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Income Tax Assessment Act 1997 (ITAA 1997);

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Industry Research and Development Act 1986 (IR&D Act); and

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Taxation Administration Act 1953 (TAA 1953).

1.14 The modifications to the relevant Acts will be notional, rather than actual. That is, while the modifications will have legal effect, they will not change the actual consolidated versions of the relevant laws.

1.15 Also, the modifications will have an 'ambulatory effect' as those Acts are amended from time to time. For example, unless otherwise stated, a regulation restricting quarterly credits to entities that are expected to qualify for a refundable R&D tax offset would automatically align with any changes in the rules for accessing the refundable R&D tax offset (such as, by way of illustration, a change to the $20 million annual turnover threshold).

1.16 The relevant Minister must recommend to the Governor-General that the necessary regulations are made before 1 January 2014. Having the recommendations made by 1 January 2014 reflects the intention that the quarterly credits regime apply from the quarter commencing on that date. [ Amendment 8, Schedule 3A, subitem 2(2 )]

1.17 The Governor-General may vary the regulations, but not repeal them. [ Amendment 8, Schedule 3A, item 8 ]

1.18 The Governor-General may additionally make regulations dealing with matters of a transitional, application or saving nature relating to the making of the regulations. [ Amendment 8, Schedule 3A, item 9 ]

1.19 The regulation power in item 2 does not limit the more general powers to make regulations under either Division 909 of the ITAA 1997 or section 48 of the IR&D Act.

First objective - allowing for quarterly credits

1.20 The first objective for the regulations is to create a regime allowing an R&D entity to be credited by the Commissioner of Taxation (Commissioner) with quarterly amounts during an income year if particular requirements are satisfied. [ Amendment 8, Schedule 3A, subitem 3(1 )]

1.21 The regime will be one of credits to an R&D entity's taxation account and, to the extent that a credit results in a surplus (that is, after other taxation liabilities have been satisfied), an amount will be refunded to the entity in accordance with Division 3A of Part IIB of the TAA 1953.

1.22 As with the rules for R&D tax offsets more generally, both Innovation Australia (the Board) and the Commissioner will play a role in considering whether an R&D entity is eligible to receive quarterly credits.

Eligibility requirements that are to be included in the regulations

1.23 Although the requirements that R&D entities need to satisfy in order to access quarterly credits for an income year are yet to be finalised, the amendments list three eligibility criteria that the regulations will include. [ Amendment 8, Schedule 3A, subitem 3(2 )]

1.24 The first is that it is reasonable to expect that the R&D entity will be entitled to a refundable R&D tax offset for the income year in relation to R&D activities conducted during the income year. This reflects the intention that quarterly payments anticipate, rather than supplant, the income year's refundable R&D tax offset. [ Amendment 8, Schedule 3A, paragraph 3(2 )( a )]

1.25 This test necessarily entails making interim decisions about the ultimate eligibility of activities and expenditures. However, acceptance or rejection of a claim for a quarterly credit will not prejudice an R&D entity's application to register the activities after the end of the income year or their claim for a tax offset on the expenditures as part of their income tax assessment for that year.

1.26 Consistent with the first eligibility requirement, the second requirement is that the R&D activities (or purported R&D activities) for which quarterly credits are sought have not received negative findings from the Board. This ability of the Board to make a negative finding is not intended to supplant the year-end registration process, but to reduce the likelihood of quarterly credits being received for activities that ultimately prove ineligible for registration. [ Amendment 8, Schedule 3A, paragraph 3(2 )( b )]

1.27 The third eligibility requirement is that the quarter for which a credit is sought begins on or after 1 January 2014 (the intended start date for the regime). [ Amendment 8, Schedule 3A, paragraph 3(2 )( c )]

1.28 In addition to these mandated eligibility criteria, the regulations may provide for further criteria in relation to eligibility for a quarterly credit and the amount of a quarterly credit (see below).

Second objective - tax neutral consequences

1.29 The second objective for the regulations is that, apart from the timing impact inherent in the regime, receiving quarterly credits should not affect the R&D entity's ultimate tax outcome. That is, whether or not an R&D entity receives quarterly credits should not ultimately affect the amount of R&D tax incentive received for an income year. [ Amendment 8, Schedule 3A, item 4 ]

1.30 Accordingly, the amendments allow the regulations to provide for the quarterly credits received in anticipation of the refund that is expected to arise on assessment as a result of the refundable tax offset to be reconciled with the actual tax position of the R&D entity upon assessment.

Scope of regulations

1.31 In addition to and without limiting the matters specified above, the amendments list a range of other matters that the regulations may address [ amendment 8, Schedule 3A, item 5 ]. Broadly, these include the following categories:

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more detailed eligibility criteria, possibly including:

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that there be a reasonable expectation that the R&D entity will be in a net refund assessment position for the income year; and/or

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that the R&D entity has previously received an R&D tax offset;

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rules for making applications:

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this could include fees, but not so as to amount to taxation;

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rules for considering and ruling on applications, including requests for further information, notification of decisions, changes to decisions, reviews and appeals;

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information sharing between the Board and the Australian Taxation Office (ATO);

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the respective roles of the Board and the ATO;

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calculating quarterly credits;

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the relationship between quarterly credits and other parts of the tax system; and

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integrity measures, possibly including (but not limited to):

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clawing back (prior to assessment) of any quarterly credits that ought not to have been received;

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the Commissioner making default assessments and special assessments under sections 167 and 168 of the ITAA 1936; and

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penalties and/or interest to cater for instances in which an R&D entity is found not to have an entitlement to a refundable R&D tax offset or where its quarterly credits exceed its refund on assessment.

Other matters

1.32 The regulations may include specific provisions for different kinds of entities. [ Amendment 8, Schedule 3A, subitem 6(1 )]

1.33 The regulations may empower a person to make a decision of an administrative character, possibly in accordance with decision-making principles. [ Amendment 8, Schedule 3A, subitem 6(2 )]

Alternative constitutional basis

1.34 The amendments have been prepared on the basis that provision of a quarterly credit - and consequent payment to an R&D entity - is supported by the Commonwealth's executive power. Nevertheless, specific reading down rules have been included to safeguard the quarterly credits provisions if, in a constitutional challenge, the High Court were to find that the executive power did not support the payment of quarterly credits in the prescribed manner.

1.35 The reading down rules are similar to those in Schedule 3, item 4 of the Bill, and are discussed in paragraphs 3.106 to 3.108 of the explanatory memorandum. [ Amendment 8, Schedule 3A, item 7 ]

Chapter 2 - Amendment to the Income Tax Rates Amendment (Research and Development) Bill 2010

Amendment 1 - deferral of start date

2.1 Amendment 1 makes a minor amendment to Schedule 1, item 4 of the Bill to defer the start date by twelve months. The effect is that, consistent with similar amendments to be moved to the Tax Laws Amendment (Research and Development) Bill 2010, the amendments to the Income Tax Rates Act 1986 will apply to income years commencing on or after 1 July 2011.

2.2 The amendments made to that Act by the Income Tax Rates Amendment (Research and Development) Bill 2010 are discussed in paragraph 3.132 of the explanatory memorandum for that Bill.