Senate

Supplementary Explanatory Memorandum

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

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.