New tax legislation provides additional incentives for companies investing in Australian research and development (R&D).

The Australian Government’s $1.8 billion R&D Tax Incentive provides eligible companies with a tax offset for expenditure on eligible R&D activities for income years commencing on or after 1 July 2011.

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 $20 million per annum;
• a non-refundable 40 per cent tax offset (equivalent to 133 per cent deduction) for all other eligible R&D entities. Unused offset amounts can be carried forward for use in future income years.

Tax offsets are applied directly to a company’s income tax liability to reduce the amount of tax they have to pay.

Eligible entities are:

• Australian companies;
• corporations that are Australian residents for tax purposes;
• foreign companies resident in a country with which Australia has a double tax agreement and that carry on R&D activities through a permanent establishment in Australia; and
• public trading trusts with a corporation acting as a trustee.

R&D activities conducted overseas are also eligible under certain circumstances.

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, however, any excess offsets may be carried forward for use in future income years.

The R&D Tax Incentive is the Australian Government’s principal initiative to encourage R&D, reaffirming that companies investing in R&D are critical to the innovation that drives Australia's competitiveness and productivity.

For detailed information on the R&D Tax Incentive, visit AusIndustry’s website.