Tax incentives in Asia-Pacific

Australia

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The Australian Government introduced the R&D incentives program to encourage the Australian industry to undertake R&D activities, putting in place an overall environment that supports increased commercialization of new process and product technologies developed by eligible companies. The current R&D tax incentive regime has been in operation since 2011, superseding the previous R&D tax concession regime that was introduced in 1986.

There are a number of other grant programs that small-and medium enterprises (SMEs) can access in Australia, including the accelerating commercialization grants, export market development grant and a range of investor incentives for early stage innovation companies.

The various Australian state governments also offer a range of grants and government incentives. Many of the Australian state governments offer government incentives to attract companies to incorporate and operate in particular states, and offer payroll tax exemptions that reduce the payroll tax liability of the company.

The Australian Government’s investment in science, research and innovation has grown considerably in recent years, from AU$6.6b between 2006 and 2007 to AU$10.1b between 2016 and 2017.

In addition, the Government has made a number of significant longer-term commitments, including AU$2.3b over 10 years to support research infrastructure through the National Innovation and Science Agenda and the AU$20b Medical Research Future Fund, which will begin disbursing funding in 2017.

Australian business has also played a key role in driving increased investments in science, as it contributes more than half of total investment in R&D. Business investment in R&D (BERD), as a percentage of GDP, grew from around 0.75% in the mid 1990s to over 1.3% at its peak between 2008 and 2009, before declining to 1.2% between 2013 and 2014. Over the same period, government expenditure on R&D (GOVERD) and higher education expenditure on R&D (HERD) have remained steady relative to GDP, with a growing share of public investment occurring through the higher education sector. In recent decades, Australia’s overall gross expenditure on R&D (GERD) as a percentage of GDP has risen steadily, peaking at 2.25% between 2008 and 2009. Recent investment has declined slightly to 2.12%, mostly driven by decreasing business investments since the global financial crisis.

R&D tax incentives

Australian R&D tax incentives can be broadly divided into two broad categories:

  • A 43.5% refundable tax offset: this is available to eligible R&D entities with aggregated turnover of less than AU$20m
  • A 38.5% non-refundable tax offset: this is available to eligible R&D entities with aggregated turnover over AU$20m

R&D entities cannot claim the R&D tax offset in respect of R&D expenditure that exceeds AU$100m.

Incentive administering body

There are two government bodies that administer the R&D tax incentive:

Statutory reference

Income Tax Assessment Act 1997 – Division 355 and Industry Research and Development Act 1986

Objective of incentive program and eligible activities

The R&D tax incentive is broad-based, market-driven assistance for all industries. It provides a targeted tax offset to encourage more companies to engage in R&D.

Incentive duration

The R&D tax incentive regime applies to companies for years of income after 1 July 2011.

Administrative requirements

Companies must lodge an annual R&D application with AusIndustry and claim the relevant R&D Tax Offset in their Income Tax Return.

General application process

  • An annual application for registration of R&D activities is required to be lodged by the R&D entity.
  • Following registration of the R&D activities for the financial year, the R&D entity lodges a R&D tax incentive schedule with their income tax return and claims the refundable or non-refundable tax offset.

Eligible R&D entities

Eligible R&D entities include those companies incorporated in Australia or foreign companies resident in a country that has a double taxation treaty with Australia carrying on business through a permanent establishment in Australia.

Extent of significance or on own behalf

Companies must demonstrate that R&D activities are undertaken on their own behalf in order to claim the R&D tax incentive.

Definition of eligible R&D activities

Eligible R&D activities are categorized as either “core” or “supporting” R&D activities. Core R&D activities are broadly defined as experimental activities whose outcome cannot be known or determined in advance and are conducted for the purpose of generating new knowledge. Supporting R&D activities may also qualify if they are undertaken to directly support the core R&D activities.

Foreign-owned R&D activities

R&D activities that are conducted by the R&D entity for one or more foreign corporations that are related to the R&D entity (referred to as foreign-owned R&D activities) may qualify for the R&D tax incentive, subject to conditions. Foreign-owned R&D activities cannot be undertaken overseas.

Eligible R&D expenditure

Eligible expenditure is defined as expenditure incurred by an eligible company during an income year, including contracted expenditure, salary expenditure and other expenditure directly related to R&D activities.

Location of R&D activities

R&D activities must be performed in Australia unless an overseas finding certificate is granted by AusIndustry.

Expenditure in relation to overseas R&D activities that are de minimis to the total R&D claim can also potentially be claimed.

Documentation

Companies must maintain contemporaneous records in order to substantiate their R&D tax incentive claim.

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