Research and Development Tax Incentive in Australia

This article discusses the tax incentive for research and development in Australia. It covers the ITAA 1997, research and development tax incentive, effectiveness, tax reformation and more. The tax incentive helps small businesses subtract expenses by 125% and promotes engagement in research and development activities. Read now on Desklib.

Running head: TAXATION LAW
Taxation Law
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Table of Contents
Introduction:...............................................................................................................................2
Overview of the regularity:........................................................................................................3
ITAA 1997:................................................................................................................................4
Research and development tax Incentive:..................................................................................6
Effectiveness of the tax incentive:.............................................................................................7
Tax reformation:.........................................................................................................................9
Future Implications:...................................................................................................................9
Conclusion:..............................................................................................................................10
Reference List:.........................................................................................................................12

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Introduction:
There are numerous nations that provides the substantial subsidies for the innovations
associated to the research and development. In the year 1985-86 research and development
tax incentive was introduced by Australia that offers the business with the amenities of
subtracting the expenses by approximately 150% 1. The implementation of tax concession in
the research and development was introduced in the year 1985 when the Australian business
industry was making their shift towards more integration and international economy.
The tax concession in the research and development was introduced by the
government for re-orienteering the Australian companies as well as altering the management
attitudes towards the research and development 2. In order to expand the small business
sector, the government of Australia has introduced the entree research and development as
the mechanism of support that provides the business with softs of moving in the direction of
research and development which have significantly led during the last decade at the
government expense. The tax concessions that is provided is termed as generous in respect of
the Australian standards. Notwithstanding of the rate of discount that is provided in the
concession, Australia offers that small business with the third most generous treatment of tax
of research and development among the other OECD countries.
1 Dechezleprêtre, A., Einiö, E., Martin, R., Nguyen, K.T. and Van Reenen, J.,. Do tax
incentives for research increase firm innovation? An RD design for R&D (No. w22405).
National Bureau of Economic Research 2016.
2 Ernst, C., Richter, K. and Riedel, N. Corporate taxation and the quality of research and
development. International Tax and Public Finance, 21(4), pp.694-719 2014.

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Overview of the regularity:
The tax incentive that is provided to the small business for research and development
helps in promoting the engagement of the research and development activities that ultimately
benefits the Australian economy and also provides encouragement through tax incentives to
the small business3. The program of research and development was very launched as the
temporary measures that was due to be concluded on 30 June 1991. However, the Australian
government in the March month made an announcement that the research and development
activities would for a permanent measurement that would have the feature of one single
subject with numerous changes over the period of time.
The basic feature that govern the activities of the research and development is the tax
incentive that is provided to the small business so that the small business is encouraged to
undertake the activities of the research and development in Australia4. The concept of
research and development is held as the wider subject that has changed over the years. The
government implemented the tax concession of 150 per cent with the objective of promoting
the Australian companies engaged in the activities of research and development. The
objective of the company is to make the companies more internationally competitive and
innovations oriented. The primary purpose of providing tax concession was to improve the
situation of commercialization relating to the innovative process and techniques with the help
of which the products are developed in Australia.
3 Armstrong, C.S., Blouin, J.L., Jagolinzer, A.D. and Larcker, D.F., Corporate governance,
incentives, and tax avoidance. Journal of Accounting and Economics, 60(1), pp.1-17 2015.
4 Castellacci, F. and Lie, C.M., Do the effects of R&D tax credits vary across industries? A
meta-regression analysis. Research Policy, 44(4), pp.819-832 2015.

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According to the Taxation ruling of TR 92/2 an explanation has been provided
relating to some certain forms of expenses that occurs at in the process of scientific research
and development which forms its base on subsection 73A (1) of the ITAA 1936 5. The
taxation rulings provide that small business should be allowed to claim deductions on their
income tax relating to the research and development activities under subsection 73 A (1) of
the ITAA 1936. The expenses are not considered as the allowable deductions under any other
provision of the act. Under the taxation ruling of 92/2 small business are provided with the
facilities of claiming an allowable deductions relating to the expenses of the research and
development given the activities are conducted from the approved scientific research
institute6. In order to claim deductions for the small business it is necessary that the expenses
that are incurred relating to the research and development should be from the scientifically
research institute.
ITAA 1997:
The ITAA 1997 is viewed as the Australian parliament. It is regarded as the primary
statute of computing the tax liability. The ITAA 1997 provides numerous sections and acts
but the primary consideration is the tax incentive for the research and development activities
in which the small business engage7. Under subsection 73 A (1) of the ITAA 1997 there are
5 Shen, L., He, B., Jiao, L., Song, X. and Zhang, X., Research on the development of main
policy instruments for improving building energy-efficiency. Journal of Cleaner
Production, 112, pp.1789-1803 2016.
6 Graetz, M.J. and Warren, A.C., Integration of corporate and shareholder taxes. 2016
7 Renwick, M.J., Brogan, D.M. and Mossialos, E., A systematic review and critical
assessment of incentive strategies for discovery and development of novel antibiotics. The
Journal of antibiotics, 69(2), p.73 2016.

5TAXATION LAW
certain forms of expenses under the taxation ruling of 92/2 that is allowed as deductions.
Since the adoption of the enactment of section 73 A of the ITAA 1946 the taxpayer are able
to make a claim for the research and development associated to the cost that are occurred by
the business on the scientific research and development. The section 73 A of the ITAA 1946
provides that the expenses relating to the research and development is not deductible under
any other provision of the law8.
According to the ITAA 1997 there are generally two types of the research and
development payment that are allowed as deductions for the business. This comprises of the
payments and the expenses that are in the nature of capital. Under the section 73 A of the
ITAA 1997 it allows the small business to claim both types of payments since that are
incurred in generating the assessable income in the business course9. However an important
consideration of the ITAA 1997 is that both types of payments should be made only the
scientifically approve research institutes.
Research and development tax Incentive:
Ever since the introduction of the section 73 A in 1946 the taxpayers are provided
with the facilities of claiming a permissible deductions for the expenses that are occurred in
the scientific research and development and the same may not have been allowed as
allowable deductions under any other provision of the act. In order to be held eligible for the
small business to claim deductions relating to research and development there are some
8 Saad, N., Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-
Social and Behavioral Sciences, 109, pp.1069-1075. 2014.
9 Appelt, S., Bajgar, M., Criscuolo, C. and Galindo-Rueda, F. R&D Tax Incentives: Evidence
on design, incidence and impacts 2016.

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conditions that is required to be fulfilled10. This comprises of the payments that is made to the
research and development institute should be scientifically approved institute and must in the
associated with the business purpose.
Under section 73 A small business are allowed to claim an allowable deductions
associated to the research and development given the plant is used specifically for the
business purpose. According to the subsection 73 A (1) an explanation has been provided that
during the year of income small business are allowed to claim deductions associated to the
gaining of taxable income11. But an important consideration of the subsection 73 A (1) is that
such payment is only made to the scientifically approved research and development institute.
Additionally the objective of undertaking the activities of research and development should
be relate to the class of business in which the business operates. Under subparagraph of 73A
(1) (a)(i) payments associated to the approved research and development institute are held
deductible. Such payments are usually viewed as contractual based payments and are usually
associated to the particular working of the taxpayers business.
The research and development tax incentives provides the small business with the
facilities of tax offset in order to promote engagement in research and development research
and development actions12. Under this scheme small business are provided with 43.5%
10 Busom, I., Corchuelo, B. and Martínez-Ros, E., Tax incentives… or subsidies for business
R&D?. Small Business Economics, 43(3), pp.571-596 2014.
11 Richardson, G., The Determinants of Tax Evasion: A Cross-Country Study. In Financial
Crimes: Psychological, Technological, and Ethical Issues (pp. 33-57). Springer, Cham. 2016.
12 Dechezleprêtre, A., Einiö, E., Martin, R., Nguyen, K.T. and Van Reenen, J., Do tax
incentives for research increase firm innovation? An RD design for R&D (No. w22405).
National Bureau of Economic Research 2016.

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refundable tax offset to the research and development entities that eligible and has the
aggregate annual turnover of less than $20 million each year. In addition to this the small
business are offered with 38.5% of the non-refundable tax offset relating to the amount that is
unused and can be offset or carried forward for use in future. The activities of research and
development assures that in the event of revocation the provision would still be applied for
things that is carried out by the small business.
Effectiveness of the tax incentive:
The concessional rate of 125 per cent provides the small business with concessional
deductions relating to all types’ research and development that eligible13. The effectiveness of
the research and development tax incentive is that small business are able to subtract the
current expenses by a minimum of 125 per cent from their total costs that is incurred in their
business. The current costs consists of the wages, salaries and other types of labour costs that
are directed towards the research and development activities. Additionally these costs must
be contracted with the scientifically approved research and development institutes.
The effectiveness of the research and development tax incentives comprises of giving
the small business with the opportunity of claiming the cost of depreciation to the equipment
that is used in the process of research and development for more than the period of three
years14. The effectiveness of the provision is that tax deductions can be claimed equivalent to
125 per cent of the deductions which is applicable for the small business. Small business that
are considering to conduct the research and development would be allowed to claim an
13
14 Middleton, T., Banning, disqualification and licensing powers: ACCC, APRA, ASIC and
the ATO–regulatory overlap, penalty privilege and law reform. Company and Securities Law
Journal, 33, pp.555-580. 2015.

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allowable deductions if the activities of research and development is carried out from
approved institutes.
Not like several special tax provision there is a strong and economic rationale relating
to the research and development tax credit15. Expenses associated to the research amounts the
understanding of the business and economy. This paves the way for new innovative research
and changes in the process or products provides an economical products and services. Upon
making a successful innovations there is an increased economic expansion and efficiency as
well. Higher amount of productivity improves the standard of living for the citizens. Hence,
promoting the innovation in small business it results in improved productivity with better
income for business.
The research and development tax incentive is regarded as an effective tool since
small business are facilitated to invest in the research and development activities till they
obtain the equivalent costs of conducting the research16. Ideally, the small business are able to
make investment in those activities that not only yields benefits for the business but for the
society as well.
Tax reformation:
The main purpose of tax reformation is to promote economic expansion and cutting
the effective tax rate involved in investment. Respondents of small have voiced that there is a
needed reformation in tax incentive structure. The government must showcase stability for
15 Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., Australian Taxation Law
2016. OUP Catalogue 2016.
16 Barkoczy, S., Foundations of taxation law 2016. OUP Catalogue 2016.

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research and development tax incentive to derive greater output. There is a need for
government certainty.
Stability in the government policy is required in the biotechnology industry as it
involves higher costs of products, hazardous clinical trials and longer development of
pipeline. There is a need of government stability in the tax incentive policy by providing
guarantee to the program17. Reforming the tax incentive policy would ultimately help in
creating a strong tax incentive policy.
Future Implications:
Relating to the future direction the government has introduced a refundable tax offset
that would be capped at $4 million on annual basis that is mainly applicable on the small
claims18. Any kind of claim which is greater than $4 million then it would be carried forward
to the future years as non-refundable offset. The refundable offset would provide a benefit at
fixed rate of 13.5% which would be associated to the company tax rate.
A premium benefit would also be introduced by the government that has wider
benefits for those claimants that undertake higher intensive research with higher rate of non-
refundable tax offset 19. A new budget has been announced by the government of $2.4 billion
to create an effective research and development tax incentive. The policy of the government
17 Tan, L.M., Braithwaite, V. and Reinhart, M., Why do small business taxpayers stay with
their practitioners? Trust, competence and aggressive advice. International Small Business
Journal, 34(3), pp.329-344. 2016.
18 Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and
Wende, S., Understanding the economy-wide efficiency and incidence of major Australian
taxes. Canberra: Treasury working paper, 2001 2015..

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is found to be emphasising on the tax incentive instead of emphasising on the future direction
of research and development.
Conclusion:
On a conclusive note the tax incentive is regarded as the essential part of the
Australian innovation policy and it is vital in attracting investment from small business.
However, it should be noted an adverse response from the government towards tax incentive
might result in reduced investment from the outside sources.
The small business might struggle to obtain appropriate fund relating to research and
development and may result in lessor number of firms in the activities of research and
development. The government must seriously boost the innovations in small business by
funding their activities and should introduce more stability in it’s polices for uninterrupted
economic growth.
19 Long, B., Campbell, J. and Kelshaw, C., The justice lens on taxation policy in Australia. St
Mark's Review, (235), p.94. 2016.

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Reference List:
Appelt, S., Bajgar, M., Criscuolo, C. and Galindo-Rueda, F. R&D Tax Incentives: Evidence
on design, incidence and impacts 2016.
Armstrong, C.S., Blouin, J.L., Jagolinzer, A.D. and Larcker, D.F., Corporate governance,
incentives, and tax avoidance. Journal of Accounting and Economics, 60(1), pp.1-17 2015.
Barkoczy, S., Foundations of taxation law 2016. OUP Catalogue 2016.
Basak, S., Equalization Levy: A New Perspective of E-Commerce Taxation. Intertax, 44(11),
pp.845-852. 2016.
Bronzini, R. and Piselli, P., The impact of R&D subsidies on firm innovation. Research
Policy, 45(2), pp.442-457 2016.
Busom, I., Corchuelo, B. and Martínez-Ros, E., Tax incentives… or subsidies for business
R&D?. Small Business Economics, 43(3), pp.571-596 2014.
Cao, L., Hosking, A., Kouparitsas, M., Mullaly, D., Rimmer, X., Shi, Q., Stark, W. and
Wende, S., Understanding the economy-wide efficiency and incidence of major Australian
taxes. Canberra: Treasury working paper, 2001 2015..
Castellacci, F. and Lie, C.M., Do the effects of R&D tax credits vary across industries? A
meta-regression analysis. Research Policy, 44(4), pp.819-832 2015.
Dechezleprêtre, A., Einiö, E., Martin, R., Nguyen, K.T. and Van Reenen, J.,. Do tax
incentives for research increase firm innovation? An RD design for R&D (No. w22405).
National Bureau of Economic Research 2016.

12TAXATION LAW
Dechezleprêtre, A., Einiö, E., Martin, R., Nguyen, K.T. and Van Reenen, J., Do tax
incentives for research increase firm innovation? An RD design for R&D (No. w22405).
National Bureau of Economic Research 2016.
Ernst, C., Richter, K. and Riedel, N. Corporate taxation and the quality of research and
development. International Tax and Public Finance, 21(4), pp.694-719 2014.
Graetz, M.J. and Warren, A.C., Integration of corporate and shareholder taxes. 2016
Long, B., Campbell, J. and Kelshaw, C., The justice lens on taxation policy in Australia. St
Mark's Review, (235), p.94. 2016.
Middleton, T., Banning, disqualification and licensing powers: ACCC, APRA, ASIC and the
ATO–regulatory overlap, penalty privilege and law reform. Company and Securities Law
Journal, 33, pp.555-580. 2015.
Renwick, M.J., Brogan, D.M. and Mossialos, E., A systematic review and critical assessment
of incentive strategies for discovery and development of novel antibiotics. The Journal of
antibiotics, 69(2), p.73 2016.
Richardson, G., The Determinants of Tax Evasion: A Cross-Country Study. In Financial
Crimes: Psychological, Technological, and Ethical Issues (pp. 33-57). Springer, Cham. 2016.
Saad, N., Tax knowledge, tax complexity and tax compliance: Taxpayers’ view. Procedia-
Social and Behavioral Sciences, 109, pp.1069-1075. 2014.
Shen, L., He, B., Jiao, L., Song, X. and Zhang, X., Research on the development of main
policy instruments for improving building energy-efficiency. Journal of Cleaner
Production, 112, pp.1789-1803 2016.

13TAXATION LAW
Tan, L.M., Braithwaite, V. and Reinhart, M., Why do small business taxpayers stay with their
practitioners? Trust, competence and aggressive advice. International Small Business
Journal, 34(3), pp.329-344. 2016.
Woellner, R., Barkoczy, S., Murphy, S., Evans, C. and Pinto, D., Australian Taxation Law
2016. OUP Catalogue 2016.