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R&D tax changes to impact small business

Research and development (R&D) tax amendments that passed the Senate this week are mixed news for small business, says Deloitte.

News Michael Masterman 12 February 2015
— 2 minute read

The amendments, suggested by the Palmer United Party, replace a proposed $20 billion threshold measure with an annual expenditure cap of $100 million per claimant with effect from 1 July 2014 for 10 years. It is also expected this agreement will supersede the proposed 1.5 per cent reduction in the rate of R&D tax offsets.


Serg Duchini, Deloitte Australia national R&D tax leader, said a number of problems remain with the new measures, including the retrospective nature of the amendments.

“Companies will have already committed to a number of R&D projects currently underway and these measures may now affect their financial viability at a very late stage. Deloitte believes a start date of 1 July 2015 would have been better practice.”

Mr Duchini said the new measures will also affect a wider range of sectors including those which currently employ large numbers of research staff, especially those businesses within the pharmaceutical and health care sectors.

“This increases the potential to deter R&D investment in Australia by large companies which have the ability to conduct R&D offshore in countries with more attractive tax incentives.

“The certainty of a 10-year sunset period will be insufficient to encourage companies to retain their R&D in Australia during that period, and once offshored, it may be difficult to tempt the R&D back to Australia.”

Unfortunately, said Mr Duchini, there appears to have been little consideration of the supply chain impacts and the inevitable flow-on consequences for smaller businesses based in Australia that often undertake collaborative R&D activities for larger companies.

“The missed opportunity for small business, with the Senate rejecting the Australian Greens' amendment to reintroduce the proposed quarterly refundable credit legislation, is also disappointing – this would have enhanced the effectiveness of the incentive for smaller innovators,” he said.

“Should the cut in the company income tax rate be reduced for small business to 28.5 per cent, this will represent a welcome increase in the net tax R&D benefit to 11.5 per cent or 16.5 per cent for small and medium-sized companies depending on the rate of company income tax and the R&D tax offset rate they are entitled to.”

However, according to Mr Duchini, the rejection of the long-proposed income threshold measure is welcome.

“Given the Government is intent on passing a savings measure in this area, an expenditure cap is more in line with some international practice. As yet, specific modelling of the effect of the amendments has not been seen.

“Overall, the timing of any amendments is unusual given the proposed review of Australia’s innovation policy is in progress. Our preference would have been to defer any piecemeal changes for a more holistic review of support for Australian innovators,” Mr Duchini said.

R&D tax changes to impact small business
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