New R&D tax credit scheme advancing Australia? Part one

By Sergio Duchini & Kate Mahady*

The exposure draft legislation was released on December 18th, 2009 and the proposed changes are more severe than those anticipated in the white paper. Many of the changes were alluded to in the2009/2010 budget and the subsequent consultation paper however it is clear that the consultation process was not able to shift Treasury opinion on the importance of a supportive R&D tax incentive program in Australia.
The current R&D tax concession is a broad based, market driven tax concession that gives companies income tax deduction of up to 125 per cent of qualifying expenditure and in some cases up to 175 per cent on incremental R&D expenditure.
While on the face of it, the new R&D tax credit scheme appears to be favourable in relation to the higher base rate of 40 per cent tax credit for companies with a turnover equal to or greater than $20 million and a 45 per cent credit for companies with a turnover or less than $20 million (which is also refundable), the tightening of the eligibility criteria with respect to eligibility and expenditure will mean many companies will not be able to access the R&D credit program and for those that can, the additional compliance costs will erode the benefit significantly.
Historically, mining companies have been amongst the largest claimants of the R&D tax concession. Companies in the mining sector have also been extremely successful in commercialising the results of R&D providing material benefits for the Australian economy.
Claims have centred round the development of new or improved:
• Mineral exploration technologies or equipment;
• New geological knowledge;
• Drill and blast techniques;
• Mining method development, mineral extraction or processing technologies;
• Throughput and mill process efficiency;
• Environmental solutions for waste and rehabilitation water and dust suppression; and
• Development of new equipment for use in mining operations.
The proposed R&D program has moved away from the broader, market driven research and development criteria and is to be focused predominantly companies that undertake  pure or applied research. The program appears squarely aimed at subsidising research and development that creates ‘spill over’ benefits for other firms in the economy, and at rewarding companies that undertake R&D outside of their normal business operations or in addition to activities that they would otherwise contemplate (‘additionality’).
The credit program is aimed to be cost neutral to Government for the first four years of operation and to achieve this objective the Government is attacking the largest claimants of R&D, including those in the mining sector.
The key proposed changes will impact directly on resources companies in the following ways:
• New definition for R&D to include considerable novelty AND high levels of technical risk;
• Dominant purpose test to supporting activities;
• Feedstock adjustment.

* Sergio Duchini and Kate Mahady, are R&D partner and senior R&D manager respectively, at Deloitte Touche Tohmatsu.

To read the final part of this report click here.

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