Enhanced R&D reform announced as part of 2020-21 Federal Budget release

The Treasury has scrapped plans to introduce controversial changes to the R&D Tax Incentive that proposed to lower its value, introduce a cap on cash rebates, and apply retrospective clawbacks for 2020 claims already made.

As part of this year’s Federal Budget, Treasurer Josh Frydenberg has walked back on his plans to cut $1.8 billion from the R&D Tax Incentive, pledging to give the scheme a $2 billion boost instead.

As a result of this injection into the scheme, the contentious Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 will be replaced by an enhanced R&D Tax Incentive reform package, which proposes to make the following changes to the Incentive:

  • Raise the tax offset rate for SMEs (i.e. businesses with an aggregated turnover of less than $20 million) from 16% to 18.5% above the prevailing tax rate;
  • Abandonment of the proposed $4 million cap on annual cash rebates for SMEs;
  • A simplified R&D intensity test for larger businesses (i.e. with an aggregated turnover of more than $20 million), which offers:
    • A baseline non-refundable tax offset rate set at 8.5% above the prevailing company tax rate for companies whose total R&D expenditure represents 2% or less of their overall company expenditure; and
    • A more generous non-refundable tax offset rate set at 16.5% above the prevailing company tax rate for those whose R&D expenditure intensity is higher than 2%.

Additionally, the overall cap for eligible R&D expenditure will be increased from $100 million to $150 million.

While these changes are set to come into effect as of 1 July 2021, the legislation will need to be passed in order for them to be formally introduced into the tax law.