Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)
General outline and financial impact
The new research and development tax incentive
The Government's new tax incentive for research and development (R & D) is implemented through the Tax Laws Amendment (Research and Development) Bill 2010 (Bill), together with the supporting Bill , the Income Tax Rates Amendment (Research and Development) Bill 2010.
The new R & D tax incentive provides more generous benefits for eligible activities than the existing concession and is better targeted towards R & D that benefits Australia. It is also substantially simpler and accompanied by improved administrative arrangements. The new R & D tax incentive replaces the existing R & D Tax Concession for all income years starting on or after 1 July 2010.
The two core components of the new R & D incentive are:
- a 45 per cent refundable R & D tax offset for eligible entities with a turnover of less than $20 million; and
- a non-refundable 40 per cent R & D tax offset for all other eligible entities.
Accompanying this change of rates and delivery mechanism is a clearer and better targeted definition of eligible 'R & D activities' that will ensure that the incentive is available in circumstances consistent with the underlying rationale for government intervention and that it delivers value for money for taxpayers.
The Bills amend the Income Tax Assessment Act 1936 , the Income Tax Assessment Act 1997 , the Income Tax (Transitional Provisions) Act 1997 , the Income Tax Rates Act 1986 , the Taxation Administration Act 1953 and the Industry, Research and Development Act 1986 .
Chapter 1 of this explanatory memorandum contains an introduction to the new R & D tax incentive, while Chapters 2 to 5 explain the amendments in detail.
Date of effect: The new R & D tax incentive applies for income years starting on or after 1 July 2010.
Proposal announced: The Government announced this measure in the 2009-10 Budget.
Financial impact: On an underlying cash basis, the amendments in these Bills are expected to be budget neutral over the new R & D tax incentive's first four years of operation. After allowing for the savings from the abolition of the existing R & D Tax Concession from 1 July 2010, this expected result reflects two factors that broadly offset each other:
- an expected increase in number and tax cost of claims resulting from the increased concessionality of the new R & D tax incentive; and
- an expected contraction in the value of certain claims based on eligibility criteria to better target the incentive.
Tables 1.1 and 1.2 show the net impact of the interaction of these factors.
Impact on fiscal balance
The fiscal balance recognises payments under a refundable tax offset in the year in which the underlying activity occurs that gives rise to the offset. The underlying cash balance recognises these same payments a year later, when they are actually made by the Australia Taxation Office. Because of this accounting treatment, there appears to be a much larger impact on the fiscal balance (shown in Table 1.1) than there is on the underlying cash balance (shown in Table 1.2).
Note: That the fiscal balance presented above is larger than the estimates presented in the 2009-10 Budget. This is mostly due to an increase in uptake of the concession.
Compliance cost impact: This measure provides a tax benefit above the normal corporate income tax benchmark and, as the benefit is voluntary, all associated compliance costs are also voluntarily incurred.
There will be compliance costs associated with the change from the former arrangements during the early stages of the new incentive, but these will reduce as taxpayers become accustomed to the new scheme 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 this transition. Further, the Bills amend the law to grant Innovation Australia additional advice-giving powers to give taxpayers greater certainty.
The draft R & D provisions are shorter, clearer and simpler than the existing R & D provisions, mainly because the four different benefits available under the existing law are replaced with an entitlement to a single tax offset. The Bills are less than one third of the length of the corresponding provisions in the existing tax law.
Overall, once the new R & D tax incentive matures, the compliance costs should represent an appropriate compromise between a broad-based, self-assessment scheme and the need to protect the integrity of the income tax system, and be lower than the comparative costs of obtaining the current benefit of the R & D Tax Concession.