Australian R&D Tax Incentive

How The Australian Research and Development (R&D) Tax Incentive Works

Peter C. Johnson, MD and Gerald L. Klein, MD

Principals, MedSurgPI, LLC

Introduction

In order to foster greater corporate R&D investment to spur jobs and innovation, the Australian government adopted the R&D Tax Incentive system in 2011.  While its stipulations have gradually changed over the years, it remains a generous incentive for companies large and small to invest in R&D in Australia.  The plan has two broad elements, one aimed at supporting companies having less than 20 million in annual revenue (these are Australian dollars, equivalent to 13.4 million US dollars) and those having greater than 20 million in revenue.  The incentive applies not only to native Australian companies but also to foreign companies that establish a bona fide Australian presence and comply with Australian business guidelines as set by the Australian Securities and Investments Commission (ASIC: https://www.investopedia.com/terms/a/australian-securities-and-investments-commission-asic.asp).  A straightforward set of FAQs regarding these requirements can be seen here: http://cosec.com.au/frequently-asked-questions/faqs-on-australian-companies/.   Additionally, types of R&D activities that are eligible for the benefit are carefully defined in order to prevent abuse of the system.  These and current applications of the Incentive are outlined below:

R&D Expenditure Threshold

For all companies, the threshold R&D spending amount to which the Incentive applies is now 150M Australian dollars (100.5 million US dollars).

Companies Having Less Than 20 Million in Revenue

Such companies are entitled to a refundable tax credit equal to their corporate tax rate percentage plus 13.5 basis points.  Given that the present corporate tax rate is 27.5%, their refundable tax credit as of the 2019 legislation is 41% of their R&D spend.  The word “refundable” requires some explanation.  For companies whose revenues impart no tax burden, they are entitled to a cash rebate of 41% of their R&D spend.  If they have a tax burden, the 41% will initially be used to offset that amount of tax burden up to and including 41% of their R&D spend.  If their tax burden does not achieve this level, the refundable incentive will first be used to offset their tax burden and the remainder distributed to the company as a cash rebate.

The Incentive also distinguishes between expenditures for clinical trials and for R&D that is not specifically a clinical trial expenditure (such as preclinical studies).  There is a 4 million Australian dollar (2.68 million US dollar) cap on the latter activities but no limit on the Incentive as applied to clinical trial activities up to the R&D Expenditure Threshold of 150 million Australian dollars.

Some examples are shown in as follows, applicable only to companies having less than 20 million Australian dollars in revenue.

Example 1: Acme Medical spent zero dollars on Clinical R&D and six million dollars on Non-Clinical R&D.  Its tax burden was zero so its tax offset is zero and it receives a cash rebate of four million dollars.*

Example 2: RNA Science spent one hundred million dollars on Clinical R&D and zero dollars on Non-Clinical R&D.  Its tax burden was zero so its tax offset is zero and it receives a cash rebate of forty one million dollars.

Example 3: Mitochondrial Solutions spent zero dollars on Clinical R&D and ten million dollars on Non-Clinical R&D.  Its tax burden was four million so its tax offset is four million and it receives a cash rebate of zero dollars.*

Example 4: Atlas Diagnostics spent fifty million dollars on Clinical R&D and six million dollars on Non-Clinical R&D.  Its tax burden was two million so its tax offset is two million and it receives a cash rebate of 19.7 million dollars.**

*Only the first 4M of any R&D tax offset for non-clinical trial related activities can be applied each year.  Any remainder must be carried forward as a non-refundable tax offset (see below) that can be applied in future years.  This limit does not apply to clinical trial activities.

*In this instance, non-clinical R&D spend refund, capped at 4M is partially applied (2M) to offset the 2M tax burden, leaving 50-2=48*.41=19.7M available as a cash rebate.

Companies Having Greater Than 20 Million in Revenue

Circumstances of application of the Incentive are quite different for larger companies.  Companies having greater than 20 million in revenue are entitled to a non-refundable tax incentive equal to their corporate tax rate PLUS a sliding scale premium based on the level of intensity of their R&D expenditure.  “Non-refundable” in this instance means that the Incentive rebate only applies to offsetting the company’s tax burden with no cash rebate.  However, if the calculated tax incentive amount exceeds that of its annual tax burden, the residual amount can be carried forward as an applicable tax credit for future years.

The sliding scale R&D “intensity premium” (that is, above and beyond their corporate tax rate)  is calculated as a function of the percent of a company’s total expenses that are represented by R&D expenses.  For an R&D Intensity Range (that is, R&D expense as a percentage of total expenses) that is less than or equal to 4, the Incentive Premium (% of Total Expense) is 4.5.  When the R&D Intensity Range is greater than 4 but less than or equal to nine, the Incentive Premium rises to 8.5%.  Finally, when the R&D Intensity Range is greater than nine, the Incentive Premium rises to 12.5%.

The following provides some examples of how the program applies to entities having greater than 20 million in annual revenue.  Note that corporations having greater than 50 million in annual revenue are subjected to a 30% corporate tax rate.

Example 1: Claro Science’s R&D expense is 1 million versus total expense of 40 million.  It has 45 million in revenue.  Its applicable corporate tax rate is 27.5%.  Its tax burden is 12.4 million and its R&D expense as a percent of total expense is 2.5.  Its Incentive Premium (% of total expenses) is 4.5.  Its earned incentive tax offset is 18 million.  Therefore, this year its incentive tax offset is 12.4 million and it is able to carry forward 5.6 million in incentive tax offset for future years.

Example 2: Adams Medical’s R&D expense is 3 million versus total expense of 50 million.  It has 60 million in revenue.  Its applicable corporate tax rate is 30%.  Its tax burden is 18 million and its R&D expense as a percent of total expense is 6.  Its Incentive Premium (% of total expenses) is calculated as 4.5(4)+8.5(2).  Its earned incentive tax offset is 35 million.  Therefore, this year its incentive tax offset is 18 million and it is able to carry forward 17 million in incentive tax offset for future years.

Example 3: Hong Kong System’s R&D expense is 9 million versus total expense of 135 million.  It has 150 million in revenue.  Its applicable corporate tax rate is 30%.  Its tax burden is 45 million and its R&D expense as a percent of total expense is 6.7.  Its Incentive Premium (% of total expenses) is calculated as 4.5(4)+8.5(2.7).  Its earned incentive tax offset is 40.3 million.  Therefore, this year its incentive tax offset is 40.3 million and it is able to carry forward zero dollars in incentive tax offset for future years.

Example 4: Pacific Bio’s R&D expense is 50 million versus total expense of 450 million.  It has 500 million in revenue.  Its applicable corporate tax rate is 30%.  Its tax burden is 150 million and its R&D expense as a percent of total expense is 11.1.  Its Incentive Premium (% of total expenses) is calculated as 4.5(4)+8.5(5)+12.5(2.1).  Its earned incentive tax offset is 86.8 million.  Therefore, this year its incentive tax offset is 86.8 million and it is able to carry forward zero dollars in incentive tax offset for future years.

*R&D Expenditure Threshold capped at 150M.  See above.  Also, the scale applies incrementally – that is R&D expenditure up to 4% is rewarded by a 4.5% inventive premium, that portion of R&D expenditure between 4% and up to 9% is rewarded by an 8.5% incentive premium and that portion of R&D expenditures > 9% of total expenses is rewarded by a 12.5% incentive premium.

In Country Guidance

Support for companies seeking these benefits – especially foreign entities with an Australian presence – can be assisted through the complexities of compliance and application by local consultancies having expertise in these areas.  A Google search entitled “Australian firms providing R&D tax incentive support” provides a starting point for the identification of such groups: https://search.yahoo.com/search?fr=mcafee&type=E211US667G0&p=Australian+firms+providing+R%26D+tax+incentive+support.  Australian Contract Research Organizations are also adept at guiding clients to such support organizations.

Overall, the Incentive is jointly administered by Innovation and Science Australia (ISA) and the Australian Taxation Office (ATO), the former responsible for registering R&D activities while the latter manages the rules regarding who is eligible and overseeing acceptable costs.  Background information and guidance regarding eligibility and application to the program can be found here: https://www.business.gov.au/grants-and-programs/research-and-development-tax-incentive

The revised legislation governing the program as introduced into the Australian Parliament in 2019 can be found here: Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019.