Australia Reveals New Tax Incentives Including Crackdown on R&D

; posted on
May 9th, 2018

The Australian government has used its 2018-19 Budget to announce a crackdown on research and development (R&D) tax incentives. Australian Treasurer Scott Morrison said he would unveil new proposals for taxing multinational digital companies within weeks.

Proposals for Multinational Digital Tax

The new budget aims to limit “the number of debt deductions multinational entities can claim in Australia,” and ensures “asset valuations used to justify debt reductions” are genuine. The new rules would also expand the number of big companies that would fall under the tax-avoidance laws, so private or investment companies could no longer exploit loopholes.

Federal Government also promised to amend thin capitalization rules to prevent foreign investors from using multiple layers of flow-through entities, like trusts and partnerships, to convert their trading income into favorably taxed interest income. The changes to stapled structures come into force from July 1 this year, with the tightening of thin cap rules scheduled for the same date next year.

R&D Tax Incentives

Australian Treasurer Scott Morrison said in his most recent Budget speech that the government is cracking down to ensure that R&D tax incentives are used for their proper purpose, with enhanced integrity, enforcement, and transparency arrangements, saving taxpayers AU$2 billion over the next four years. "To support companies genuinely investing in R&D, we are refocusing the R&D tax incentive to give more support to companies that invest a higher proportion of what they spend in R&D, over and above what others would just do anyway," he said.

Improving R&D Tax Incentives

The Budget papers explain that the 2016 review of the R&D Tax Incentives found that the program is failing to meet its objectives of encouraging additional R&D and generating the associated flow-on benefits (spillovers) for the Australian economy. "In response, from 1 July 2018, the government will better target the R&DTI through a new R&D premium for companies with turnover of AU$20 million or more. This will ensure support for larger companies is directed towards those companies undertaking additional, high-intensity business R&D", the government explained.

New rules ensure that for companies with an aggregated annual turnover of AU$20 million and above, the marginal R&D premium will be the company's tax rate plus

  • 4 percentage points for R&D expenditure between 0 percent to 2 percent R&D intensity;
  • 6.5 percentage points for R&D expenditure above 2 percent to 5 percent R&D intensity;
  • 9 percentage points for R&D expenditure above 5 percent to 10 percent R&D intensity; and
  • 12.5 percentage points for R&D expenditure above 10 percent R&D intensity.

Sources: Reuters, ARN, ZDNet, News.com.au, Business Insider

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