Tax Laws Amendment (Research and Development) Act 2011

Overview

The Tax Laws Amendment (Research and Development) Act 2011 was enacted to amend the law relating to taxation and research and development. This Act was passed by the Australian Parliament and received Royal Assent on 8 September 2011. The primary policy objective of this Act is to provide a tax incentive for industry to conduct research and development activities that are likely to benefit the wider Australian economy by encouraging investment in activities where the outcome is uncertain. The Act aims to address the gap in support for research and development activities that may not be pursued due to the risk of uncertain returns, thus fostering innovation and economic growth. The Act amends the Income Tax Assessment Act 1997, the Industry Research and Development Act 1986, and other related legislation to introduce a new research and development tax incentive scheme, including provisions for tax offsets, notional deductions, integrity rules, and the role of Innovation Australia in registering entities and reviewing their activities.

Scope and Application

The Tax Laws Amendment (Research and Development) Act 2011, as amended, aims to amend the law relating to taxation and research and development in Australia. The Act applies to bodies corporate incorporated under Australian law, as well as foreign entities that are Australian residents and carry on business through a permanent establishment in Australia. Entities that are exempt under the Income Tax Assessment Act 1936 are excluded from the Act's application. The Act extends its application to entities carrying on business through a permanent establishment in Australia, provided the entity is a resident of a foreign country for the purposes of a double tax agreement and the business is conducted through that permanent establishment. The Act introduces a new tax offset for research and development (R&D) activities, which can be either refundable or non-refundable depending on the aggregated turnover of the entity. Certain expenditures, such as those related to acquiring or constructing buildings, acquiring or using technology, and interest, are excluded from the deduction. The Act also modifies the rules for entities conducting R&D activities for foreign residents, and includes provisions for the clawback of R&D recoupments, feedstock adjustments, and the application of the tax offset to earlier income years and R&D partnerships. The scope of the Act applies to assessments and income years commencing on or after 1 July 2011, with certain provisions applying to acts or states of affairs existing or periods ending on or after the commencement of the first income year commencing on or after that date. The Act also includes provisions for transitional arrangements and savings to ensure the legal and administrative consequences of actions taken before the repeal or amendment apply. The Act further extends its application through subordinate instruments, which may provide for additional eligibility criteria, fees, and other matters relating to quarterly credits and findings made by Innovation Australia.

Key Provisions

• The Tax Laws Amendment (Research and Development) Act 2011 (C2011A00093) introduces significant changes to the tax law, particularly in relation to research and development (R&D) activities. The Act aims to encourage industry to conduct R&D activities by providing tax incentives, particularly for entities with an aggregated turnover of less than $20 million. The key provisions include the insertion of Division 355 in the Income Tax Assessment Act 1997, which outlines the eligibility and rules for R&D tax offsets. Specifically, eligible entities can claim notional deductions for R&D expenditure and the decline in value of depreciating assets used for R&D activities, leading to a tax offset. The R&D activities must be registered under the Industry Research and Development Act 1986, and the entity must meet certain conditions, such as the expenditure being experimental and aimed at generating new knowledge.
• Entities must meet certain obligations to be eligible for the R&D tax offset. They must register their R&D activities with the Board under the Industry Research and Development Act 1986. The Board can make findings about the nature of the activities and whether particular technology is considered core technology, which affect the availability of tax offsets. Additionally, the entity must ensure that the expenditure complies with integrity rules, such as not incurring expenditure at non-arm's length and not receiving consideration equal to or greater than the expenditure. The entity is also required to account for feedstock adjustments and pay extra income tax on recoupments from government.
• Failure to comply with the provisions of this Act can lead to civil and criminal consequences. For instance, if an entity makes a false statement or representation to obtain a tax benefit, they may be liable for penalties. The penalties can include fines and imprisonment. Additionally, the Act stipulates that certain expenditures, such as those on buildings, interest, and core technology, are excluded from the R&D tax offset. Furthermore, entities that receive government recoupments relating to R&D activities must pay extra income tax on those recoupments. The Act also outlines the implications for other deductions and tax offsets, ensuring that R&D related deductions and offsets are distinct and not duplicated.
• Entities have the right to object to assessments related to R&D tax offsets and can seek review of certain Board decisions. Findings by Innovation Australia about R&D activities or technology can bind the Commissioner for the purposes of assessments and can be the subject of review. The Act includes transitional provisions to ensure that activities and expenditures registered or incurred before the commencement of the Act are appropriately treated. For example, it allows for adjustments to the effective life and decline in value of depreciating assets used for R&D activities.
• The Act also modifies the operation of several other Acts, including the Industry Research and Development Act 1986, to align with the new R&D tax offset regime. It repeals certain sections and inserts new definitions and references to ensure consistency across the amended Acts. The changes are designed to provide clarity and integrity to the R&D tax offset scheme, ensuring that only eligible activities and expenditures are considered for the tax incentives. The Act ensures that the full legal and administrative consequences of acts done before its application can still be carried out, even if some steps are taken after its commencement.

Legal classification tags

Area of Law

Taxation Law

Instrument

Act

Concepts

Definitions & Interpretation

Commencement Provisions

Repeal & Amendment

Compliance Obligations

Enforcement Powers

Review & Sunset Clauses