R&D Tax Incentive or Tax Credit- Doing Business - Invest Victoria, Melbourne, Australia
The R&D Tax Incentive and Victoria
Australia’s new R&D Tax Incentive has made Melbourne one of the most attractive locations in the world for research and development. Simple to operate and with wide eligibility, the new Tax Incentive provides eligible innovative companies with a substantial tax offset that equates to a tax burden that is 88 per cent less for R&D activities carried out in Melbourne than in the USA.
What is the R&D Tax Incentive?
The R&D Tax Incentive replaces the R&D Tax Concession as Australia’s principal initiative to support research and development. This move re-affirms the importance placed on investing in companies undertaking R&D, which is critical to innovation, competitiveness and productivity.
The new R&D Tax Incentive applies to income years beginning on or after 1 July 2011.
VIDEO: Melbourne and the R&D Tax Incentive (length: 2 min 46 sec)
The R&D Tax Incentive provides eligible companies with a tax offset for expenditure on eligible R&D activities. The two components of the program are:
a 45 per cent refundable tax offset (equivalent to a 150 per cent deduction) for eligible R&D entities with a turnover of less than A$20 million per annum; and
a non-refundable 40 per cent tax offset (equivalent to a 133 per cent deduction) for all other eligible R&D entities.
What is the difference between a refundable and non-refundable tax offset?
Tax offsets are applied directly to a company’s income tax liability to reduce the amount of tax they have to pay.
The 45 per cent R&D Tax Incentive will be a refundable tax offset, which means that if a company’s tax liability is reduced to zero, companies may be entitled to a refund of any unused offset amount.
The 40 per cent R&D Tax Incentive will be a non-refundable tax offset, which means that companies cannot access a refund for any unused offset amount if their liability has been reduced to zero. However, any excess offsets may be carried forward for use in future income years.
How do the R&D Tax Incentive and R&D Tax Concession compare?
The R&D Tax Incentive is simpler, fairer and more accessible than the previous R&D Tax Concession. Key features of the new program include:
expanded access to foreign companies who undertake R&D in Australia and to companies that hold their intellectual property offshore;
greater certainty in R&D investment, with companies able to seek an advance finding where they are uncertain of the eligibility of the activity;
more generous benefits, in particular for Small and Medium Sized Businesses; and
a clearer definition of research and development activities.
Who will be eligible to claim the R&D Tax Incentive?
Entities eligible to claim the R&D Tax Incentive are:
Australian companies;
corporations that are Australian residents for tax purposes; and
foreign companies resident in a country with which Australia has a double tax agreement and that carry on R&D activities though a permanent establishment in Australia.
This represents an expansion on the kinds of entities that were eligible for the R&D Tax Concession. Expanding access for foreign corporations ensures the R&D tax provisions do not discriminate against foreign corporations which are permanent Australian taxpayers.
Who will administer the R&D Tax Incentive?
Innovation Australia is an independent statutory body established to assist with the administration of the Australian Government’s innovation and venture capital programs designed to support industry innovation. This includes administration of the R&D Tax Incentive.
How will the R&D Tax Incentive operate?
Like the R&D Tax Concession, companies will be required to register annually with Innovation Australia before being able to claim a tax offset. Companies will need to register eligible R&D activities no more than 10 months after the end of the income year in which the activity occurred. Activities conducted in income years that commenced prior to 1 July 2011 will be registered and claimed under the R&D Tax Concession. Activities conducted in income years that commence from 1 July 2011 onwards will be registered and claimed under the R&D Tax Incentive.
What activities are eligible under the R&D Tax Incentive?
Qualifying R&D activities must be divided between ‘core’ and ‘supporting’ activities in the registration documentation. ‘Core’ R&D activities are defined as experimental activities:
whose outcome cannot be determined in advance;
that can only be determined by applying a systematic progression of work that is based on principles of established science; and
that are conducted for the purpose of generating new knowledge.
‘Supporting’ R&D activities are:
activities directly related to core R&D activities; and
in some cases, only activities that are undertaken for the dominant purpose of R&D.
Does the R&D Tax Incentive support activities conducted overseas?
Generally only R&D activities conducted in Australia or the external Territories qualify for the R&D Tax Incentive. However in certain circumstances, R&D activities conducted overseas may also qualify. To be eligible for this benefit, companies must apply to Innovation Australia. This feature of the program recognises the fact that Australia does not always have all the necessary R&D expertise and facilities to meet industry needs, and that research is increasingly global in nature.
R&D in Melbourne, Victoria
A recent KPMG report, ‘Competitive Alternatives’, highlights that the new system will benefit almost every sector in the Victorian economy. Building on Victoria’s existing R&D strengths, the new globally competitive Tax Incentive will make Melbourne one of the world’s most attractive tax environments for Research & Development.
How does Melbourne compare for R&D?
City (rank)
Total Tax Index
City (rank)
Total Tax Index
Melbourne (1)
10.2
Boston (16)
89.2
Montreal (2)
13.1
Seattle (28)
100.7
Sydney (3)
14.1
Paris (35)
122.4
London (6)
38.4
Tokyo (37)
131
Portland (15)
89.2
Frankfurt (39)
158.6
Melbourne: Australia’s R&D capital
Victoria leads Australia for expenditure on R&D by foreign owned businesses, accounting for 30 per cent of the national total in 2008-09. The state is also the national leader for R&D investment in key sectors such as: automotive (72 per cent), basic chemicals (50 per cent) and advanced food processing (40 per cent). Victoria offers investors a highly innovative operating environment with access to world-class research institutions, a strong pipeline of talented and motivated professionals, a stable and transparent regulatory environment, and an enviable quality of life.
