For a long time government has been concerned that the R&D tax system is being abused. And with a recent cases of tax advisors who take a success fee going to jail it is no wonder.
So the recent budget has targeted businesses with a turnover of more than $20m (and this covers a big swag of Perth family owned businesses).
If you turnover less than $20m
If your turnover is less than $20m you will still enjoy upfront tax refund/cash payment with the R&D tax incentive.
Perth Technology Pty Ltd has an annual turnover of $600 and spends $3m on R&D.
Perth Technology Pty Ltd will still enjoy a tax refund each year due to the R&D Tax Offset.
However from 1 July 2018 your tax refund from the R&D system will be capped at $4m.
If your tax refund exceeds this amount the excess will be a tax rebate. And the tax rebate can be carried forward to future years and offset future tax liabilities.
The value of the tax refund/ tax cash payment will now provide an additional tax deduction of 13.5% to 16% depending on the company tax rate. The varying position is because small companies pay less tax than larger companies.
Another way to consider the benefit is to provide an additional 13.5% premium tax deduction over the company’s current tax rate.
If your turnover exceeds $20m
For a family business with a turnover exceeding $20m the changes are significant. In essence companies that are heavily committed to R&D will enjoy more of a benefit than companies that spend very little (as a portion of costs) on R&D.
The primary driver is that many businesses who were undertaking R&D were doing that as a very small portion of the overall business. In most instances the R&D spend was considered “business as usual” expenditure.
The marginal R&D benefit will now be:
- An extra 4% tax deduction if your R&D spend is less than 2% of your total expenditure.
- An extra 6.5% tax deduction if your R&D spend is between 2% and 5% of your total expenditure.
- An extra 9% tax deduction if your R&D spend is between 5% and 10% of your total expenditure.
- An extra 12.5% tax deduction if your R&D spend is over 10% of your total expenditure.
The intensity testing will apply from 1 July 2018. However to continue to enjoy the same benefit a larger company will now need to spend at least 5% of their expenditure each year on R&D tax changes.
So why the tax changes?
As a practice we have seen the R&D tax system increasingly being used by family owned businesses. However we have also seen the rise of unethical tax advisors charging a “fee for service” to our clients as a percentage. In effect the tax advisor is conflicted in their advice to encourage clients to inflate their level of claim over and above what they are “really” doing in terms of R&D.
This is particularly worrying when the R&D tax system – from both an Aus Industry and Tax Office perspective is self-assessed.
The government has also seen this rise in claimant for the R&D tax system. And many businesses are putting “business as usual” expenditure as new innovative research.
What is important to note is that for many family owned businesses the value of the R&D tax system has increased. And with the additional scrutiny on R&D activities the need for independent advice that is not success based in increasingly important.
At Westcourt we never take conflicted remuneration. We are simply focussed on making family owned businesses great – and we do that with independence and knowledge.