Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)Chapter 1 Lift the expenditure cap for eligibility to the Research and Development Tax Offset
Outline of chapter
1.1 Schedule 1 to this Bill amends the tax law to increase the research and development (R & D) expenditure cap for eligibility to the R & D Tax Offset from $1 million to $2 million.
1.2 All references to legislative provisions in this chapter are references to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise stated.
Context of amendments
1.3 The R & D Tax Concession contained in the ITAA 1936 provides a concessional tax deduction to companies that incur expenditure in undertaking eligible R & D activities. Certain companies can choose to receive a tax offset (R & D Tax Offset) rather than a deduction.
1.4 As part of the 2009-10 Budget, the Government announced that it will replace the existing R & D Tax Concession with a new R & D tax incentive, with effect from 1 July 2010. For additional details refer to the Treasurer's Media Release No. 062 of 12 May 2009.
1.5 The Government announced that as an interim measure, it would increase the R & D expenditure cap for eligibility to the existing R & D Tax Offset from $1 million to $2 million, with effect from 1 July 2009.
Summary of new law
1.6 This amendment increases the R & D expenditure cap for eligibility to the R & D Tax Offset from $1 million to $2 million.
Detailed explanation of new law
1.7 Section 73B of the ITAA 1936 provides a tax deduction to companies that incur expenditure in undertaking eligible R & D activities. In many cases the deduction is equal to 125 per cent of expenditure.
1.8 Under section 73I, certain companies, as set out in section 73J, that incur expenditure on eligible R & D can choose a tax offset instead of a deduction. The R & D Tax Offset is equal to 30 cents in every dollar that the company would have been able to deduct if it had chosen to claim a deduction. For a deduction of 125 per cent, this would equate to an offset of 37.5 per cent of expenditure.
1.9 The R & D Tax Offset is refundable, allowing these companies to 'cash out' the R & D Tax Concession. This means it is most attractive to companies that are in a tax loss position, who cannot immediately benefit from an additional tax deduction.
1.10 To be eligible for the R & D Tax Offset, paragraph 73J(1)(c) requires that the R & D group (as defined in section 73K) of which the company claiming the Offset is a part have an 'aggregate research and development expenditure amount' that is not more than $1 million (this imposes a 'hard cap' on expenditure).
1.11 This measure increases the R & D expenditure cap for eligibility to the existing R & D Tax Offset from $1 million to $2 million, with effect from 1 July 2009. [ Schedule 1, item 1, paragraph 73J(1 )( c )]
1.12 Lifting the expenditure cap provides a further boost to small pre-profit companies in research intensive industries, ahead of the introduction of the new R & D tax incentive in 2010-11, and mitigates the incentive for firms to keep their R & D spending under the current expenditure cap.
Example 1.1
Barksdale Technologies Ltd is a company that satisfies the conditions in section 73J, with the exception of paragraph 73J(1)(c). The company is not part of a broader R & D group. In 2009-10, the company incurs expenditure of $1.5 million on eligible R & D activities.
Without this amendment, Barksdale Technologies would be unable to elect to claim the R & D Tax Offset, as it has not met the existing condition in paragraph 73J(1)(c). That is, the company's R & D aggregate expenditure exceeds the hard cap on expenditure of $1 million.
Following this amendment, Barksdale Technologies is able to elect to claim the R & D Tax Offset because its R & D aggregate expenditure is below the new hard cap on expenditure of $2 million.
Application and transitional provisions
1.13 This amendment commences from the date this Bill receives Royal Assent and applies to years of income starting on or after 1 July 2009.
1.14 It is expected that the provision will be repealed as part of the introduction of the new R & D tax incentive in 2010-11.
1.15 Schedule 1 does not contain any transitional provisions.