Proposed R&D tax credit incentives

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By Sergio Duchini & Kate Mahady*

The anticipated reforms will have a considerable effect on R&D claims for mining companies in Australia, and companies will need to plan for these changes now.
The R&D tax system overhaul will deliver most of the recommendations of the Review of the National Innovation System on tax support arrangements for R&D (the Cutler review), and will replace the current R&D tax concession system from July 1st, 2010.
The current R&D tax concession is a broad-based, market driven tax concession that gives companies income tax deductions of up to 125 per cent of qualifying expenditure (and in some cases the premium or incremental 175 per cent) on R&D activities.
In the past, mining R&D activities claimed through the R&D tax concession scheme have included development of new or improved:
• mineral exploration technologies or equipment
• drill and blasting techniques
• mining method development
• mineral extraction or processing technologies
• throughput and mill process efficiency
• environmental solutions for waste and rehabilitation, water and dust suppression
• new equipment for use in mining operations
• new geological knowledge.
The new R&D tax credit will be a two tier broad-based credit system.
A refundable tax credit equal to 45 per cent of expenditure on R&D will be available to small to medium-sized companies with an annual turnover of less than $20 million. This significant improvement over the current scheme represents a doubling of the current support. Companies in tax loss positions will also be able to ‘cash out’ the benefit regardless of the size of their claim, as long as their group turnover does not exceed $20 million.
For companies that exceed the $20 million turnover threshold a non-refundable tax credit equal to 40 per cent of expenditure on R&D will be available. As the tax credit will be non-refundable to companies with a group turnover of more than $20 million, it is widely expected that the credit will be able to be carried forward by companies in a tax loss position. This is equivalent to a return of 10 per cent for every $1 spent of R&D, up from the current 7.5 per cent.
With the introduction of the R&D tax credit, the complex 175 per cent premium concession and international premium will be abolished from July 1st, 2010. This means that the 2009/2010 income year will be the last opportunity for companies to access the 175 per cent premium concession and international premium.
Planned changes affecting the mining industry were alluded to in the Budget announcement. It was suggested that the eligibility criteria for the R&D tax credit will be tightened up to ensure that only ‘genuine R&D’ receives Government support. The main policy aim of this objective is to ensure that the new R&D tax credit is revenue neutral in comparison to the existing R&D tax concession.
Based on the recommendations contained in the Cutler review, tightening of the definition of eligible R&D activities may focus on preventing what are referred to as ‘whole of mine’ claims.
These claims are generally significant in nature, are not common and reflect the substantial technical challenges that need to be overcome specific to that operation. These claims do not sit well with the regulators, although they often do fit within the technical requirements of the R&D concession. It must be noted that while it may be true that whole of mine claims may attract large R&D incentives, it is also true that the mining sector plays a significant role in supporting the Australian economy and pays its fair share in both direct and indirect taxes.
Important considerations for mining companies now include considering whether there may be scope to legitimately maximise their R&D claims prior to the tightening of the definition of R&D activities. Companies with increasing levels of R&D expenditure may also wish to bring R&D spending forward to take advantage of the 175 per cent premium concession before it ends on July 1st, 2010.
Similarly, it may be more beneficial for some companies to postpone their R&D activities legitimately until the new scheme commences. In any case, now is the time to be thinking strategically about these issues.
The proposed R&D tax credit scheme is a significant improvement over the current R&D tax concession and is anticipated to result in higher levels of support to Australian companies, but the effect on mining sector may not be as favourable.
Before the planned implementation of the tax credit scheme there will be a consultation process with industry, followed by a discussion paper due late August to early September 2009. The draft legislation is proposed to be issued mid-October 2009, with submissions due on the draft legislation by the end of November 2009. The Bill is scheduled to be considered by Parliament mid February 2010, with a proposed July 1st, 2010 effective date.
Companies in the mining sector should consider expressing a view about the proposed changes by participating in the consultation process, to help the industry get the best outcomes under the new scheme.

* Sergio Duchini and Kate Mahady, are R&D partner and senior R&D manager respectively, at Deloitte Touche Tohmatsu.