R&D Tax Credit tipped to boost small businesses

Labor’s new R&D Tax Credit was passed through the Senate yesterday with amendments brokered by the Greens, including a quarterly payment option for small businesses.

The reforms propose a credit system that gives a 45% refundable R&D tax credit to organisations with an aggregated turnover of less than $20 million per annum.

All other companies will receive a 40% non-refundable tax credit. The Government expects to hand out $1.6 billion in tax credits annually.

Instead of receiving the tax credit in an annual lump, the Greens successfully pushed to have quarterly payments in a bid to improve cashflow for companies.

David Gelb, KMPG partner and head of R&D practice, says SMEs will be the main beneficiaries of the scheme.

“SMEs will be able to obtain a cash refund of 45% for their R&D, which provides a substantial incentive for them to take on the risk of innovating on new products and processes,” he says.

“At a time of uncertainty… it is pleasing that the Government has committed extra support for R&D. This will undoubtedly encourage entrepreneurship.”

“The new legislation also lifts a cloud of uncertainty for businesses that were holding back investing in innovation.”

Similarly, professional services firm Deloitte says the scheme will deliver much-needed certainty to Australian companies considering their future R&D investment programs.

Deloitte tax partner Serg Duchini says the laws will require a “collaborative and constructive approach to its implementation” to ensure affected firms are able to extract maximum benefit.

“This bill will transform the way many Australian companies structure their research and development activities. Some companies are going to see considerable benefits from the new regime,” Duchini says.

“Companies with an annual group turnover of less than $20 million will receive a refundable 45% R&D tax offset for uncapped expenditure incurred on a reshaped activity profile, delivering a 15% net benefit.”

Duchini says companies need to understand the differences between the current R&D Tax Concession and the new R&D Tax Offset, and plan for the transition.

“The new R&D Tax Offset presents a number of complex issues that companies will need to navigate if they are going to extract the maximum value,” he says.

“These include the new definition of eligible activities, the requirement to track and cost eligible activities at a more granular level, a new regime for the treatment of feedstock expenditure and a range of expanded administrative requirements.”

Similarly, Australian Industry Group has praised the scheme, with chief executive Heather Ridout saying it will support research and development “in large swathes” of manufacturing.

“We will be closely monitoring the take-up and effectiveness of the scheme and would urge the Government to be open to future amendments,” Ridout says.

“There is a lot of change in the scheme and how it is administered. It will be important for the Government to make a substantial effort to build understanding in industry of these changes.”

In the United Kingdom, the Government has increased the rate of R&D tax credit for SMEs from 175% to 200% for 2011/12 and 225% thereafter, subject to EU approval.

For a profitable SME spending £500,000 on qualifying R&D, each additional 25% deduction will be worth around £25,000 in cash.

In the United States, companies that don’t have research expenses for the previous three years can use 6% of their qualified research expenses to offset their tax liability, if they have any.

If you don’t have tax liability, they can claim the credit prospectively and carry it forward into a year when they do owe taxes.