What is the R&D Tax Credit?

The R&D Tax Credit legislation has had a chequered past, going through multiple revisions and stalling before entering the Senate prior to the federal election.

R&D Tax Credit

The R&D Tax Credit was announced in May 2009 by the Minister for Innovation, Industry, Science and Research, Senator Kim Carr, as a replacement for the R&D Tax Concession. The intention of the bill was to give a leg up to small innovative companies that are engaged in heavy research and development, such as biotechnology and biopharmceutical companies.

The original R&D Tax Concession offered a tax deduction on a company's taxable earnings based on research and development expenditure. However, such a concession was only beneficial to companies that had a sizable tax debt and didn't help businesses that were yet to turn a profit, such as the majority of startup biotechnology companies.

Furthermore, the vast majority of the Tax Concession was being doled out to the same large organisations. As Kim Carr remarked in 2009: "Last year, 80 per cent of the R&D Tax Concession went to just 100 companies. The remaining 7,900 firms registered for the scheme divided the balance between them. The other two million Australian businesses stayed home."

And of those 100 companies, many included big business, such as banks and mining companies, rather than small research-based businesses.

Replacement for Commercial Ready

The shift from a tax concession to a tax credit was intended to redress that balance and redistribute the funds across a broader range of companies, including small, innovative, research-heavy companies, such as those engaged in biotechnology.

It was also slated as a replacement for the Commercial Ready grant scheme, which was scrapped when Kevin Rudd came to power, and was replaced with the similarly structured Climate Ready scheme, which offered little for biotechs.

How the R&D Tax Credit works

The R&D Tax Credit as proposed offers a 45 per cent refundable tax credit to eligible firms that are not more than 50 per cent owned or controlled by a tax exempt entity and that have an aggregated turnover of less than $20 million per annum; and a 40 per cent non-refundable R&D tax credit will be available to all other eligible firms.

A refundable tax credit will first deduct the amount of tax liability a company has, and if there is still credit left over, the company may claim that in the form of a refund from the government. The non-refundable tax credit will only reduce a company's tax liability, although any surplus can be carried over to subsequent years.

This means a small research-intensive biotechnology company that is yet to turn a profit can claim a tax credit, and receive a refund from the government for up to 45 per cent of its R&D spend, if eligible.

Eligibility criteria

However, the eligibility criteria have been a sore point of contention, with business lobby groups and the opposition suggesting the requirement that only programmes, the 'dominant purpose' of which is research and development, be eligible, rather than R&D that might take place in the normal course of business.

It also doesn't apply to R&D that leads directly to a saleable product or service, thus earning the criticism from business lobbyists that it rewards 'failed' R&D rather than successful R&D.

Criticism of the R&D Tax Credit

Some of the criticism, including that from Shadow science and innovation minister Sophie Mirabella, is that the new R&D Tax Credit bill will harm sectors such as building and manufacturing.

Another point of contention is that the bill be made to apply retrospectively. The bill was originally intended to be passed and come into effect before the start of the 2010-2011 financial year. However, the federal election delayed its introduction into the Senate, and it was eventually reintroduced into the lower house.

Future of the R&D Tax Credit

Senator Carr still maintains that the R&D Tax Credit is a good bill, and that it should apply retrospectively to enable research-intensive companies to receive some government assistance during the 2010-2011 financial year, although as time presses on without the bill being written into law, making it apply retrospectively becomes increasingly problematic.

The bill has now passed the lower house and is awaiting debate in the Senate, with Senator Carr willing to listen to proposed amendments, such as the retrospective start date.

You can read more about the R&D Tax Credit, its specific provisions and eligibility criteria at AusIndustry website.