Government set to tighten eligibility requirements for R&D grants

The Rudd Government will tighten eligibility requirements of its new R&D grants under its new tax credit scheme, which will come into force from 1 July next year.

The new tax credit scheme replaces the current R&D Tax Concession scheme, which allows a company to deduct at least 125% of the amount spent on eligible R&D expenses from its corporate tax bill.

Under the new R&D tax credit scheme firms with turnover less than $20 million will be able to access a 45% refundable tax credit (the equivalent to a 150% concession), while companies with turnover of more than $20 million will be able to access a 40% tax credit (the equivalent of a 133% deduction).

But Federal Innovation Minster Kim Carr and Treasurer Wayne Swan want to tighten the eligibility requirements for the R&D.

Under the new requirements, eligible R&D will need to meet two tests: that the activity is additional to normal R&D undertaken by a company; and that the R&D activity has benefits that can be shared by other companies or the community.

At present, only one of these tests needs to be satisfied.

“Under the new incentive system, eligibility criteria will be tightened to ensure the best return for the taxpayers’ investment. All businesses stand to benefit, in different ways, from the reformed scheme,” Carr said in a statement.

Grant consultant Adrian Spencer of GrantReady warns that companies look certain to face an increased compliance burden under the new rules.

He is particularly disappointed with moves to try and separate “core” and “supporting” R&D activities, seeing this is an opportunity for the Government to reduce its R&D grants bill by making everyday R&D ineligible.

“This is a bit of a throw back to the old days and it’s really just about them trimming around the edges so they don’t have to give out so much money.”

He is also worried about mooted changes to R&D in the area of IT. For example, the Government has suggested that, similar to R&D laws in Britain, the creation of websites may no longer be considered to be an eligible R&D activity.

Spencer gives the example of online discount travel site Wotif, which has received support from R&D grants but would have potentially been ineligible under the new rules.

“If the government doesn’t fund those sort of things then we are all paying exorbitant hotel bills,” he says wryly.

“A lot of the companies that we have worked with have leveraged R&D assistance for websites to get a place on the world stage.”

The new requirements are contained in a consultation paper released by Carr and Swan. Interested stakeholders are invited to comment by 26 October.

Spencer says companies should make their voices heard on the matter.

“These are only proposed changes and now is the time for people to have a say in this process. If they don’t these changes will just go through.”