Cutler and Company completed a review of The National Innovation System in the last quarter of 2008. Amongst other things, the improvements to Australia’s existing R&D Tax Concession are recommended.
Many organisations, particularly those that are already taking advantage of the R&D Tax Concession are curious as to the impact the recommendations if accepted, will have on them. In this issue of Innovation Update, Whitebox summarises the recommendations related to the R&D Tax Concession and looks at how these will translate for most organisations.
As it currently stands, the R&D Tax Concession is a tax deduction rather than a tax credit; a reversal of this has been recommended. Under the status quo, organisations decrease the amount owed in taxes by decreasing income. The new system would provide a dollar for dollar deduction to the amount of tax owed and this would be paid more regularly, at least quarterly in arrears. Whilst a more regular payment is advantageous to organisations, Cutler acknowledges the need for caution as this could result in additional administrative overheads for all parties.
The existing R&D Tax Concession, incorporates the following:
· 125 percent R&D Tax Concession
· 175 percent Premium
· R&D Tax Offset
· International Premium
If the recommendations are accepted, these would be replaced with a Tax Credit of 40 percent for large firms, with a refundable Tax Credit of 50 percent available to smaller firms with turnover under $50 million.
R&D expenditure undertaken in Australia by foreign-owned firms would be eligible for the 40 percent Tax Credit but excluded from the refundable Tax Credit. The eligibility scope will broaden to ensure that all R&D undertaken in Australia that meets relevant definitions can apply for the tax credit.
The Internet and the increasing importance it brings to bear on innovation is an underpinning theme throughout review and the report recommends the following intermediate measures:
· R&D on open source programs qualify for the multiple sale test.
· Undertake a review of guidelines so that eligible activity is clearly identified.
· Put in place appropriate measures to heavily constrain ‘whole of mine’ and similar claims against the existing R&D Tax Concession program or proposed Tax Credit program.
The Cutler Report proposes the above, not as a series of stand-alone recommendations in relation to the existing R&D Tax Concession, but rather intends these taxation measures to be treated as one package.