KEY POINTS
- The R&D Tax Concession was introduced in 1985 to encourage Australian industry to undertake more research and development (R&D) activities.
- The concession rate was 150% until 1996 when it was reduced to 125%. At the same time syndication was closed and eligible expenditure was tightened. The Tax Offset and the 175% Premium were introduced in 2001 and the 175% International Premium in 2007.
- The current concessions available are:
- a tax deduction of up to 125% for R&D expenditure;
- a 175% Premium tax deduction for increases in R&D expenditure above a rolling three year average;
- a 175% International Premium for eligible R&D undertaken in Australia, regardless of where the intellectual property
is held; and
- an R&D Tax Offset for companies spending less than $1m for the year and with a turnover of less than $5m.
- For the 2006-07 financial year, 6,806 companies were registered for the tax concession, this is a 8% increase on the previous year. These companies reported R&D expenditure of $11.595 billion, an increase of 26% on the previous year. (based on 30 June 2008 data):
- 39% of registered companies used the 125% to claim a tax deduction;
- 19% used the 175% Premium to claim a tax deduction; and
- 36% used the Tax Offset at the 125% and 6% at the 175% rate.
- Australia's ratio of Business Expenditure on Research and Development (BERD) to GDP in 2006-07 was 1.15 compared to the OECD total of 1.56. Australia's BERD/GDP ratio is now above that of Canada (1.06), the United Kingdom (1.1), the Netherlands (0.96) and Ireland (0.89).
- On this measure, Australia was ranked 14th in the OECD in 2006-07, compared to 8th in 1995-96.
- The R&D Tax Concession was examined as part of the review of the National Innovation system. The report of the Review Venturous Australia - building strength in innovation, can be accessed at http://www.innovation.gov.au/innovationreview/Pages/home.aspx . The Government is currently considering the recommendations of the review and will respond with a white paper early next year.
FACTS AND FIGURES
The R&D Tax Concession was introduced in 1985 to encourage Australian industry to undertake more research and development (R&D) activities. It is a broad-based, market-driven program with the applicant deciding upon the scope and timing of R&D activities. The concession rate was 150% until 1996 when it was reduced to 125%. At the same time syndication was closed and eligible expenditure was tightened. The program provides for a 125% deduction of eligible expenditure incurred on R&D activities from assessable income when lodging their tax returns.
In 2001, a 175% Premium Tax Concession and R&D Tax Offset were introduced. In 2007 the 175 per cent International Premium was introduced. It was designed to encourage additional research and development investment in Australia by firms where the intellectual property is held by an overseas company in the same enterprise group.
The objectives of the R&D Tax Concession are to provide a tax incentive in the form of a deduction, to make eligible companies more internationally competitive by:
- Encouraging the development by eligible companies of innovative products, processes and services;
- increasing investment by eligible companies in defined R&D activities;
- promoting the technological advancement of eligible companies though a focus on innovation or high technical risk in defined R&D activities;
- encouraging the use by eligible companies of strategic R&D planning; and creating an environment that is conducive to increased commercialisation of new processes and product technologies developed by eligible companies.
R&D Tax Concession data 1985-86 to 2005-06 (as at 30 June 2007)
|
Financial Year |
Company Tax Rate (%) |
R&D Tax Concession
Rate (%) |
Indicative Benefit
after tax (%) |
Number of Companies Registered |
Total R&D Expenditure ($m) |
|
1985-86 |
46 |
150 |
23 |
2,549 |
108 |
|
1986-87 |
49 |
150 |
24.5 |
1,667 |
732 |
|
1987-88 |
49 |
150 |
24.5 |
2,068 |
1,094 |
|
1988-89 |
39 |
150 |
19.5 |
2,153 |
1,322 |
|
1989-90 |
39 |
150 |
19.5 |
2,365 |
1,625 |
|
1990-91 |
39 |
150 |
19.5 |
2,499 |
2,190 |
|
1991-92 |
39 |
150 |
19.5 |
2,836 |
2,698 |
|
1992-93 |
39 |
150 |
19.5 |
2,960 |
2,973 |
|
1993-94 |
33 |
150 |
16.5 |
3,436 |
3,392 |
|
1994-95 |
33 |
150 |
16.5 |
3,624 |
3,959 |
|
1995-96 |
36 |
150 |
18 |
3,734 |
4,470 |
|
1996-97 |
36 |
125 |
9 |
3,295 |
4,174 |
|
1997-98 |
36 |
125 |
9 |
3,304 |
4,359 |
|
1998-99 |
36 |
125 |
9 |
3,185 |
5,095 |
|
1999-00 |
36 |
125 |
9 |
3,264 |
4,920 |
|
2000-01 |
34 |
125 |
8.5 |
3,733 |
5,671 |
|
2001-02 |
30 |
125
175 |
7.5
22.5 |
4,745 |
6,093 |
|
2002-03 |
30 |
125
175 |
7.5
22.5 |
5,094 |
6,363 |
|
2003-04 |
30 |
125
175 |
7.5
22.5 |
5,638 |
6,922 |
|
2004-05 |
30 |
125
175 |
7.5
22.5 |
5,979 |
8,258 |
|
2005-06 |
30 |
125
175 |
7.5
22.5 |
6,295 |
9,234 |
|
2006-07* |
30 |
125
175 |
7.5
22.5 |
6,806 |
11,595 |
Source: Number of companies and R&D expenditure from Innovation Australia Annual Report 2006-07.
Data for 2006-07 is as at the end of June 2008, and some subsequent claims are expected.
History of significant changes to the Tax Concession
|
1985 |
· R&D Tax Concession established |
|
1987 |
· The impediment to collaborative (syndicated) R&D projects by partnerships of otherwise eligible companies was removed;
· Buildings could no longer be written off over three years – normal depreciation provisions would apply. |
|
1989 |
· Changes were introduced including removing the ability to obtain a guaranteed risk-free, high-yielding return, funded by the tax payer, under some proposed syndicated R&D structures, and returns obtained not by undertaking R&D but by on-selling technology. |
|
1992 |
· Denial of the Tax Concession to companies involved in syndicates or other financing schemes involving tax exempt public sector research institutions where a guaranteed return was in place. The change was aimed to discourage syndicate financial structures that concentrated on yields from the R&D tax deduction rather than returns from commercialisation of the technology developed. |
|
1995 |
· Tax exempt private sector research institutions were barred from eligibility in new syndicates characterised by guaranteed returns. |
|
1996 |
· Closing off of the syndicated R&D arrangements
· R&D defined more precisely
· Core technology expenditure: deduction limited to one-third of R&D expenditure relating to the core technology in any year of income (at 100%)
· Pilot plant expenditure: to be written off over its effective life
· Cost of feedstock: only the net cost allowable at the 125% rate.
· Concessional rate was reduced from 150 to 125 percent (in August,) |
|
2001 |
· Introduction of the 175% per cent Premium (Incremental) Tax Concession for additional investment in R&D;
· Introduction of an R&D Tax Offset for small companies in tax loss that undertake R&D, enabling them to ‘cash out’ their R&D tax losses;
· A requirement that eligible R&D activities must be supported by an R&D Plan (effective from 1 July 2002); and
· A new treatment of R&D plant-asset depreciation that allows a 125% deduction for effective life depreciation of assets used in R&D activities (on a pro-rata basis). |
|
2007 |
· 175% R&D International Premium was introduced on 25 September. |
Trends in BERD and BERD/GDP
Source: ABS 8104 various years
For BERD over GDP in the decade before 1995-96 (when the Tax Concession rate was cut from 150% to 125%) the average annual growth was 8.8% (in current terms), compared to the average annual growth since (to 2006-07) of 3.2%. In the period from 1995-96 to 1999-2000 BERD/GDP actually fell by approximately 24% in current terms. With BERD itself, in the ten years between 1986-87 to 1995-96 the average annual growth in business expenditure on R&D (in current terms) was 16.8% compared to the average annual growth since (1996-97 to 2006-07) of 10.1%.