The Rudd Government recently released draft legislation for the new R&D (research and development) Tax Credit. The draft legislation is intended to provide a more generous, more predictable, and less complex tax incentive by replacing the existing R&D Tax Concession.
Under the new R&D Tax Credit, companies will be able to invest with certainty, in the knowledge that they can claim a tax offset of at least 40 percent of their expenditure on R&D activities. This rises to 45 percent for companies turning over less than $20 million.)
The R&D Tax Credit will allow small, innovative firms to get an immediate contribution towards their R&D expenditure despite not having yet turned a profit.
For instance, a company in with losses turning over $10 million and spending $1 million on eligible R&D activities will be eligible for a refund of $450,000 rather than adding $375,000 to its tax loss. This will provide innovative start-ups with the certainty that they need to invest in growing their business.
Whilst the change seems like a positive one, the key factor impacting businesses is determining what actually qualifies as innovation under the new rules.
Currently, companies have to demonstrate that R&D activities are innovative or technically risky. In the move forward, companies will have to demonstrate both features.
What this means is that the legislation now seeks evidence of considerable novelty and high levels of technical risk. This creates a lot of uncertainty for businesses and is particularly challenging for SMEs.
The legislation is expected to be introduced into Parliament in early 2010 to ensure that taxpayers are prepared well ahead of the proposed 1 July 2010 start date for the new scheme.