About Biotechnology - Tax Incentives
The Research & Development (R&D) Tax Incentive has replaced the R&D Tax Concession to provide a more meaningful incentive and “landmark reform” for R&D in Australia.
The new tax incentive will deliver a major boost for innovative biotechnology companies and spill-over benefits for the community from biotechnologies.
AusBiotech and the biotechnology community welcomed the R&D Tax Incentive, which became a reality after passing the Australian Senate and receiving Royal Assent in early September 2011 – and was effective from 1 July 2011.
Start-up innovation companies, especially biotechnology companies trading in loss, will sit in the "sweet spot" and will be the biggest beneficiaries from the Tax Incentive’s 45% refundable component. The legislation will also benefit large innovative companies by reducing the cost of conducting eligible R&D activities in Australia by up to 10%, making Australia a more competitive location for conducting biomedical and pharmaceutical R&D and clinical trials.
By 2012, the application form was launched and by early 2013 the benefits of the new R&D Tax Incentive legislation had begun to flow back into the industry. The Program that can be traced back to the Cutler Review recommendations, was a momentous and pivotal inflection point for Australian innovation; the type we as a community will look back on in admiration and congratulate its architects’ foresight.
AusBiotech is proud of its role in campaigning for and supporting the implementation of the program. In its first six months of operation we can already point to more than $18 million that has come back to the sector this year, mostly in cash refunds. For example, Viralytics reported a cash refund of $1.5 million, Cellmid $748,000, Bluechiip $920,000, Phylogica $1.9 million. Stapharma has had $6 million approved for an overseas claim, Antisense estimated a refund of $670,000, Alchemia is to receive $2 million this year and $3 million per year over three years and Biota announced a $4.2 million offset.
Funding is scarce for young companies, so this section of the value chain is where governments can have a great impact - and the Tax Incentive is delivering.
The R&D Tax Incentive provides:
• A 45 per cent refundable tax offset (equivalent to a 150 per cent deduction) to eligible entities with an aggregated turnover of less than $20 million per annum. Companies in tax loss may take a cash refund.
• A non-refundable 40 per cent tax offset (equivalent to 133 per cent deduction) to all other eligible entities.
In addition to the incentive being more focused toward “genuine” R&D, other key changes include no limit to the amount of R&D companies can seek to claim for, changes to the definition of R&D activities, now segregating them into core and supporting, and eligibility is extended to overseas pre-approved R&D that cannot be conducted in Australia.
“Core” R&D activities are experimental activities:
- whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:
- is based on principles of established science; and
- proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and
- that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).
An activity is eligible as a “supporting” R&D activity where:
- it is directly related to a core R&D activity; or
- for certain activities, it has been undertaken for the dominant purpose of supporting core R&D activities.
Foreign companies who undertake R&D in Australia and companies that hold their intellectual property offshore will have more access to claim. The program expands on the kinds of entities that were eligible for the R&D Tax Concession to foreign corporations, to ensure ”the R&D tax provisions do not discriminate against foreign corporations which are permanent Australian taxpayers and acts as an inducement for more companies to conduct their R&D activities in Australia.”
Companies are able to seek an advance finding, where they are uncertain of the eligibility of their activity.
There is no limit on the expenditure that may be claimed, provided it meets the eligibility criteria, and there is (with minor exceptions) a minimum expenditure of $20,000.
Entities eligible to claim under the R&D Tax Incentive program 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 though a permanent establishment in Australia; and
- Public trading trusts with a corporation acting as a trustee.
Like the R&D Tax Concession, companies are required to register annually with Innovation Australia before being able to claim a tax offset. Companies will need to register eligible R&D activities within 10 months after the income year in which the activity was conducted.
The R&D Tax Incentive will apply to income years beginning on or after 1 July 2011. Companies with a standard income year (i.e. 1 July 2011 to 30 June 2012) must register their activities by 30 April 2013.
AusIndustry is a specialist program delivery division in the Department of Industry, Innovation, Science, Research and Tertiary Education with responsibility for delivering the R&D Tax Incentive program on behalf of the Australian Government. More information is available on their website.
AusBiotech has been a passionate advocate on behalf of its membership for the move to a tax credit since its recommendation by Dr Terry Cutler in the Innovation Review of 2008. Since the announcement of the policy in 2009, AusBiotech made four substantive submissions on the R&D Tax Credit and produced 11 case studies on how the incentive will benefit R&D in Australia, during the consultation process, after extensive consultations with members.
Experts from across small business and industry, including AusBiotech CEO, Dr Anna Lavelle, will oversee the implementation of the R&D Tax Incentive via a Ministerial appointment to the "R&D Tax Incentive Advisory Committee" that has been established to ensure the program provides the intended benefits to Australian industry from increased investment in research and development
AusBiotech has also welcomed news that an amendment to the Tax Credit program as it was passed will provide for quarterly payments of cash refunds, instead of annual payments, from 1 January 2014.
AusBiotech’s advocacy for payments on a quarterly basis, was supported by the Greens, to assist companies manage cash flow. A survey conducted by AusBiotech as part of a series of tax credit briefings in July 2009, indicated the timing of the receipt of payments (i.e. quarterly or annually) will be a critical factor in its value as an incentive for additional R&D activities.