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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