Summary of R&D Tax Recommendations in the Cutler Review Green Paper

This is a summary of the R&D tax concession announcements in the Cutler Review of the National Innovation System Green Paper, released today and available for download here.

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• The Green Paper acknowledges R&D tax mechanisms as an iconic and valid policy instrument as part of the National Innovation System, although they are currently "underpowered and overcomplicated".

• The Review proposes the transformation and rationalisation of R&D tax programs by replacing the current 125% tax concession, tax offset and 175% international premium concession with an R&D tax credit program.

• The R&D tax credit would be set at 40% (non-refundable) for large companies (group turnover in excess of $50 million) and foreign-owned firms, an effective concessional rate of 133% or an after tax saving of 10 cents per dollar. Whilst this restores the value to pre-1996 levels it remains below the cost of capital.

• For small companies (less than $50 million) the R&D tax credit would be set at 50%, an effective concessional rate of 166% or an after tax saving of 20 cents per dollar and the current $1 million limit would be abolished.

• The refundable tax credit may be paid more regularly than annually in arrears (eg quarterly) if appropriate risk management practices can be introduced.

• Claims for R&D conducted in Australia would be allowed regardless of where any resultant Intellectual Property may be owned.

• Open Source software may benefit from exemption from the "multiple sale" test and a lower technical risk threshold, but no other changes to the multiple sale test are recommended.

• The definition of R&D (or of directly related expenditure) or Eligibility Guidelines may be used to limit claims for "large one-off projects like mines and civil engineering" in order to "protect the revenue and continued viability of the R&D Tax Concession".

Overall, the Green Paper presents a positive future for the use of R&D tax mechanisms to stimulate, reward and incentivise the conduct of innovative and risk-based activities.

What will be of critical importance to Australian industry is how the journey from Green Paper to Policy is conducted, and beyond that how effectively the Policy is turned into practical, workable and actionable legislation.

The Government is taking responses to the Green Paper until 23 September 2008 and will announce its policy response to the program before Christmas.