The Government has announced the planned end to the 125% Research & Development (“R&D”) Tax Concession and with it the Refundable R&D Tax Offset program. In its place, a system of tax credits for business expenditure on genuine R&D will take effect from 1 July 2010 - implementing some of the recommendations of the Cutler Review of the National Innovation System.

There are significant increases in the level of benefit available under the proposed tax credit regime with different levels of incentive for SMEs and large businesses.

For companies in a tax loss, and with a turnover of less than $20 million, the new arrangement will provide a 45% refundable credit (equivalent to a 150% tax concession) compared to the current 37.5% benefits available via the R&D Tax Offset.

For tax paying companies or those with a turnover greater than $20 million, the new arrangement will provide a 40% non-refundable credit (equivalent to a 133% tax concession) representing a net after-tax benefit of 10% as compared to the current 7.5%.

A major improvement is the removal of the R&D expenditure limit for companies eligible for the refundable credit that is applied to current R&D Tax Offset claimants. A transitional arrangement for R&D Tax Offset claimants, which increases the R&D expenditure limit from $1 million to $2 million has been announced for the 2009-10 financial year. This will provide much needed help to early stage companies making large investments in experimental R&D.

As part of Senator Carr’s media release, the government indicated that along with the 125% concession, the 175% Premium R&D Tax Concession and the International Premium R&D Tax Concession will also be abolished.

As with all announcements of new programs, the devil is certainly in the detail.

The government has advised that the “eligibility criteria will be tightened to ensure that the benefit is only available for genuine R&D”.

While it is not yet clear what is meant by genuine R&D, it is understood that new legislation to replace the tax concession will provide the opportunity for adjustment to aspects of the R&D incentive program (including the definition of eligible research and development activities). However, the introduction of concepts or definitions so different as to eliminate the relevance of existing R&D tax concession judgements could severely damage the confidence that industry requires to commit to long term investment in R&D.

We will keep you informed as the details emerge. Please contact your BSI R&D consultant if you require further information.

To view the Media Release by the Ministers for Innovation, Industry, Science and research visit: http://minister.innovation.gov.au/Carr/Pages/RDTAXCREDITTOBOOSTBUSINESSINVESTMENT.aspx