After months of uncertainty, the Australian Federal Government has passed new reforms to the research and development tax incentive (RDTI) outlined in the federal budget. These changes, which were passed in mid-October 2020, are significantly different to the government’s previous plan to cut $1.8 billion from the program, much to the relief of the biotechnology sector. The new reforms will see a further $2 billion invested in the RDTI over the forward estimates period to the year 2024, which is an extra $240 million over the forward estimates compared to current policy settings.
The RDTI was first introduced in 2011 to encourage R&D activities in Australia, in recognition of the importance of driving Australian companies to become more innovative, productive and prosperous. Overall, the scheme aims to help companies by being better targeted at genuine R&D, more generous in its financial support particularly for small and medium enterprises, more predictable by decoupling incentive from the company tax rate and less complex and restrictive through the removal of requirements to hold resulting intellectual property in Australia. This initiative has, over the years, made Australia among the top ten most competitive locations for R&D investment, according to a report by KPMG.
Coming into effect from July 2021, the new reforms will see companies with an annual turnover under $20 million receive a refundable tax offset for R&D set at 18.5 percentage points above the claimant’s company tax rate. The originally proposed $4 million cap on the offset has been scrapped. The current incentive which provides a 43.5% refundable tax offset to companies with an aggregated turnover of less than $20 million and a 38.5% non-refundable tax offset to larger companies will continue to apply to until the end of the 2021 financial year.
On the other hand, a two-tier intensity approach that takes into account the level of R&D and total expenses will be used to calculate the R&D offset for larger companies. If this is between 0 and 2%, the non-refundable offset will be set at 8.5 percentage points above the company tax rate. If the measure is higher, then it will be set at 16.5 percentage points above the company tax rate. In addition to this, the expenditure threshold has been increased from $100 million to $150 million.
For the clinical trials sector, this tax credit can effectively halve the cost of undertaking projects. In a study conducted by Frost and Sullivan, it was found that in early phase clinical trials, Australia was 28% cheaper than the USA before tax incentives, and 60% cheaper after tax incentives. This made Australia a more cost-effective destination and alternative compared to many other Western world locations.
Alongside industry groups and biomedical research organisations, we are heartened to see the Australian government maintain their dedication to fostering a robust and diverse innovative ecosystem. The continuation of an attractive R&D tax incentive scheme will strengthen Australia’s leading role in clinical trials and biomedical research.