Research and Development within Australia

Yi Ba

3 December 2021

Australia has a globally competitive economy, supporting free trade, innovation and a highly skilled workforce.

When operating in the Asia Pacific region, multinational companies often view Australia as an attractive option for basing their regional headquarters.

Australia is also an attractive option for multinational businesses to establish their Research & Development (R&D) operations, with the Australian Government offering a number of programs designed to incentivise and support innovation.

Foreign R&D Investment
To attract foreign R&D investment, the Australian Government facilitates a range of programs that provide direct funding opportunities, support collaboration and enable access to state-of-the-art resources.

Available support includes the recently announced Modern Manufacturing Initiative, the Entrepreneurs’ Program, the Industry Growth Centres Initiative, the Cooperative Research Centres (CRC) program, the CSIRO agency and the R&D Tax Incentive.

CSIRO is an Australian Government agency responsible for scientific research. The agency runs a number of programs that enable businesses to access state-of-the-art resources and world-leading researchers.

The Modern Manufacturing Initiative and the Industry Growth Centres deliver innovation in key industry sectors, including medical technologies and pharmaceuticals, food and agribusiness and advanced manufacturing. The Initiatives provide direct R&D funding and support to key issues such as collaboration, commercialisation, international engagement and capability development.

The CRC program provides opportunities for industry to collaborate with Commonwealth and State Governments to focus on the development and commercialisation of innovative technologies.

R&D Tax Incentive
The R&D Tax Incentive is the Government’s $3 billion mechanism to stimulate industry investment in R&D. The program is available to both Australian and foreign companies conducting eligible R&D in Australia.

For the 2020 and 2021 income years, the program provides two rates of benefit, including a:

43.5% refundable R&D tax offset for companies with a global aggregated turnover below $20 million; and
38.5% non-refundable R&D tax offset for companies with a global aggregated turnover above $20 million.

Provided a company has sufficient tax losses, when accessing the 43.5% R&D tax offset, the entity is entitled to receive a cash refund of 43.5% on all R&D expenditure incurred up to the $100 million threshold.

Foreign companies can establish a presence in Australia to conduct R&D activities and access the R&D Tax Incentive. Companies can access the R&D Tax Incentive if they are:

Incorporated under Australian law;
Incorporated under a foreign law but are an Australian resident for income tax purposes; or
Incorporated under a foreign law and are both a resident of a country with which Australia has a double tax agreement and is carrying on business in Australia through a permanent establishment.

The intellectual property generated through the R&D activities may be held overseas by the foreign parent entity, provided it is held within the same multinational group as the Australian entity. Consideration should be given to both Australia’s and the foreign jurisdiction’s international transfer pricing rules.

Changes to the R&D Program
The 2020-21 Federal Budget announcement showed renewed Government support for business investment in R&D. The Government moved to reshape previously proposed reforms to the R&D Tax Incentive with changes that provide more support and certainty to Australian businesses. This is welcome news, with the previously proposed changes being widely criticised by businesses and industry bodies alike.

The new reform will defer the start of previously announced changes to income years starting from 1 July 2021, with the following changes:

The refundable R&D Tax Offset will be fixed at a rate of 18.5% above the claimant’s company tax rate, rather than the proposed 13.5%. It is important to note that many of the R&D claimants obtaining refunds for R&D will have their income tax rate reduced to 25%. Consequently, the increase to 18.5% ensures that the status quo is maintained and does not provide an additional uplift.
The proposed $4 million cap on annual refunds has been abandoned.
The intensity threshold for the non-refundable R&D Tax Offset will now introduce two levels of R&D Tax Offset rate:
- 8.5% above the claimant’s company tax rate for R&D expenditure between 0% and 2% of total company expenditure; and
- 16.5% above the claimant’s company tax rate for R&D expenditure above 2% of total company expenditure.
The R&D expenditure threshold has been increased to $150 million, showing increased Government support for large industry investment in innovation.

These changes were introduced in the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020 which received Royal Assent on 14 October 2020.

Future of R&D in Australia
We are pleased to see that the previously announced changes to the R&D program have been reversed and the current legislative framework does not change for 2020 and 2021 income year R&D claimants. This marks a significant step in the Government’s commitment to fostering innovation in Australia and creating jobs for the future.

The reformed changes are now in line with the Government’s Innovation and Science Agenda which, when announced was slated as being critical for Australia to deliver new sources of growth, maintain high-wage jobs and seize the next wave of economic prosperity.

We see the R&D regime in Australia as being critical to supporting Australian private enterprises invest in innovative activities.

We are confident that R&D and innovation will continue to be supported by Government. The program in its current form enables R&D focused entities to obtain an enhanced return on their eligible innovative activities. There remains many opportunities for foreign investment into R&D projects and activities in Australia, and access to top researchers and developers continues to be an attractive proposition for investing into Australian innovation.

For more information on establishing R&D operations in Australia, please contact our team.