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There has been much speculation recently regarding the introduction of the legislation for the proposed new R&D Tax Credit.

The exposure draft legislation and explanatory material was released for public comment a week prior to Christmas and the final submission’s were accepted last Friday 5th February.

If you would like to examine the draft legislation you can download it from the Treasury website here:

The new R&D Tax Credit has been widely condemned across the board by industry and business sectors. If the legislation is passed through parliament in it’s current form, many companies will be ineligible due to the new ‘dominant purpose’ test which restricts claimable supporting R&D activities, along with the new definition of R&D which now includes both novelty and high levels of technical risk as part of the criteria for eligibility.

High levels of technical risk according to the draft legislation is defined as:

“The threshold ‘high levels’ of technical risk is set down in terms of uncertainty that can only be removed through application of the scientific method based on scientific principles. This contrasts R&D from less rigorous ‘trial and error’ or ‘fitting’ that is part and parcel of simply making things work.”

The proposed legislation is geared towards limiting large scale R&D described as ‘Aggressive R&D Claimants’. Unfortunately, in the process, SME’s will be affected and as a result SME’s will limit expenditure invested in R&D. This will result in a reduction in applicants applying and effectively crippling innovation in Australia.

Let’s hope someone see’s sense in Canberra before it’s too late……watch this space.

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.

• As at 31 October 2008, a record number of 6,944 companies have been registered, with reported R&D expenditure of $12.3 billion for the 2006-07 income year. This compares with 6,390 registrations and $9.7 billion in reported expenditure for the same period last year.

• Of the 6,944 registered companies for 2006-07, 21 per cent were new registrants. The comparable figure for new registrants for 2005-06 was 19 per cent.

• Companies with less than $5 million pa turnover represent the largest group of registrants (64 per cent) for 2006-07, while companies with turnover of more than $50 million comprise 16 per cent.

• The average reported R&D expenditure for companies for 2006-07 is $1.7 million, compared with $1.5 million for 2005-06.

• In the period 1 July 2008 to 31 October 2008, 96 per cent of paper applications were registered within 30 days and 94 per cent of electronic applications were registered within 10 days.

• For the 2006-07 income year, 2374 applications were received via electronic transfer – this represents 34 percent of the total number of applications (6,944) – 66 per cent were paper based applications (4620).