Budget 2014 - R&D tax weakened for start-ups

Despite the momentous announcement in the Budget that the Medicare changes will help fund medical research in Australia, the Budget has reduced the incentive for research and development (“R&D”) in other areas. It is expected that the medical research fund will top $20 billion.

The government anticipates that the reduction in the R&D offset will be softened by the already announced reduction in the company tax rate.

Certainly, the company tax rates will go down by 1.5% from 30% to 28.5% from 1 July 2015.

While many countries near Australia  have very low company tax rates it should not be forgotten that jurisdictions like Singapore also give very generous incentives for R&D.

Currently in Australia there are two R&D tax offsets.

  • A 45% refundable tax offset for eligible entities with an aggregated group turnover of less than $20 million (will go down to 43.5%).
  • A non-refundable 40% tax offset for all other eligible entities (will go down to 38.5%).

These Budget measures which affect R&D tax offsets will have an adverse effect on small enterprises engaging in R&D.

A reduction in the corporate tax rate is useful if the enterprise makes a profit in the relevant year, a refundable offset will have the effect of the enterprise getting some of its R&D expenditure back.

However the position of start-up and early stage growth businesses is that their cash flow and profits are slim or non-existent.

Relevant link: Budget paper No 2 p 18

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