Senate

Revised Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

Chapter 22 Rates of R & D tax offset

Outline of chapter

Schedule 22 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to reduce the rate of the tax offsets available under the research and development tax incentive for the first $100 million of eligible expenditure by 1.5 percentage points. The higher (refundable) rate of the tax offset for this expenditure will be reduced from 45 per cent to 43.5 per cent and the lower (non-refundable) rates of the tax offset will be reduced from 40 per cent to 38.5 per cent.

Context of amendments

Research and development tax incentive

The research and development tax incentive is the primary mechanism by which the Commonwealth seeks to encourage companies to undertake research and development activities in Australia.

Broadly, the incentive provides:

•

a 45 per cent refundable tax offset for the first $100 million of eligible expenditure of eligible entities with a turnover of less than $20 million, and which are not controlled by income tax-exempt entities, for their expenditure on eligible research and development activities in Australia;

•

a 40 per cent non-refundable tax offset for the first $100 million of all other eligible entities for their expenditure on eligible research and development activities in Australia; and

•

a further tax offset at the company tax rate for the balance of all eligible entities' expenditure.

(see section 355-100 of the ITAA 1997.)

In determining what rate applies, an entity will be considered to be controlled by an exempt entity or entities if, broadly, the exempt entity or exempt entities hold an interest in the entity of at least 50 per cent at any time in the income year (see section 355-100 of the ITAA 1997).

The tax offset rates of 40 per cent, 45 per cent or 30 per cent of the eligible research and development expenditure replace any income tax deduction or other offset that would otherwise be available in respect of the expenditure. As a result, the first $100 million of research and development expenditure generally results in a greater net benefit than an income tax deduction for research and development expenditure at the company tax rate.

Eligible research and development activities include both core activities, being experimental activities undertaken for the purpose of acquiring new knowledge, and supporting activities, which are activities either directly related to core activities or are undertaken for the dominant purpose of supporting core activities (sections 355-20 to 355-30 of the ITAA 1997).

Eligible entities are Australian resident corporations, Australian permanent establishments of foreign corporations and certain public trading trusts (section 355-35 of the ITAA 1997) who have registered under Part III of the Industry Research and Development Act 1986 .

Provisions exist to claw back the additional tax benefit provided by the research and development tax incentive for eligible expenditure where an entity obtains a recoupment from government for the expenditure or where the expenditure relates to feedstock that has been or is sold (see Subdivisions 355-G and 355-H of the ITAA 1997).

The savings that will result from the measure will assist in the repair of the budget. Following this change, the research and development tax incentive will continue to provide a significant incentive for research and development in Australia.

Consultation

Targeted confidential consultation was undertaken on exposure draft legislation with affected stakeholder bodies. No concerns were raised during consultation.

Summary of new law

Schedule 22 to this Bill amends the ITAA 1997 to reduce the refundable and non-refundable rates of the tax offset available under the research and development tax incentive for the first $100 million of eligible expenditure from 45 per cent to 43.5 per cent and from 40 per cent to 38.5 per cent (respectively).

The changes do not affect the eligibility of entities to claim the research and development tax incentive or the administration of the research and development tax incentive more generally.

Comparison of key features of new law and current law

Detailed explanation of new law

Schedule 22 to this Bill amends the three rates of the tax offset available as part of the research and development tax incentive detailed in the table in section 355-100 of the ITAA 1997.

The first rate in the table in section 355-100 applies to entities with a turnover of less than $20 million (and to which the second rate does not specifically apply). These entities previously received a tax offset equal to 45 per cent of their first $100 million of eligible research and development expenditure. They will now receive an offset equal to 43.5 per cent of their first $100 million of eligible expenditure. [Schedule 22, item 1, item 1 in the table in subsection 355-100(1) of the ITAA 1997]

The second rate in the table applies to entities which, at any time during the income year, are controlled by an entity that is exempt from income tax (an 'exempt entity'), including entities which would otherwise meet the criteria for the first rate to apply. These entities previously received a tax offset equal to 40 per cent of their first $100 million of eligible research and development expenditure. They will now receive an offset equal to 38.5 per cent of their first $100 million of eligible expenditure. [Schedule 22, item 2, item 2 in the table in subsection 355-100(1) of the ITAA 1997]

The third rate in the table applies to all other eligible entities. These entities previously received a tax offset equal to 40 per cent of their first $100 million of eligible research and development expenditure. They will now receive an offset equal to 38.5 per cent of their first $100 million of eligible expenditure. [Schedule 22, item 3, item 3 in the table in subsection 355-100(1) of the ITAA 1997]

There is also a note to the table which previously referred to the 45 per cent rate. The note now refers to the 43.5 per cent rate. [Schedule 22, item 4, note to subsection 355-100(1) of the ITAA 1997]

For simplicity, no change has been made to the provisions providing for the adjustment of tax benefits in respect of eligible research and development expenditure where the entity obtains a recoupment for the expenditure or sells feedstock to which the expenditure relates.

Application and transitional provisions

These amendments apply in respect of assessment for income years commencing on or after 1 July 2016. [Schedule 22, item 5]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Research and development tax incentive: reducing the tax offset rates

This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

The research and development tax incentive is the primary tax mechanism by which the Commonwealth seeks to encourage companies to undertake research and development activities in Australia.

Broadly, under the research and development tax incentive, eligible entities (Australian resident corporations, Australian permanent establishments of foreign corporations and certain public trading trusts (section 355-35 of the ITAA 1997) who have registered under Part III of the Industry Research and Development Act 1986) are entitled to receive a tax offset for a certain percentage of their eligible expenditure on research and development.

As a result of the amendments, the refundable tax offset rate will be reduced from 45 per cent to 43.5 per cent for the first $100 million of eligible expenditure by taxpayers with annual turnover under $20 million that were not controlled by entities that are exempt from income tax at any point during the income year, and the non-refundable tax offset rate will be reduced from 40 per cent to 38.5 per cent for the first $100 million of eligible expenditure for all other taxpayers.

The gain to revenue and savings from this measure will be directed to repairing the budget.

Human rights implications

This Schedule does not engage any of the applicable rights or freedoms.

The change only affects the amount of tax offset that can be claimed by corporate taxpayers which engage in eligible research and development activities.

Conclusion

This Schedule is compatible with human rights as it does not raise any human rights issues.