William Buck’s dedicated technology specialists have summarised the key items for Victorian Technology businesses in this year’s Federal budget.
Given the 2021-22 Federal Budget was being announced just seven months after the 2020-21 Budget, and many of the 2021 Budget items were only just being implemented, it was always going to be interesting seeing how the Government would expand on its Economic Recovery Plan, and how this would support Australia’s technology industry.
In contrast to those industries that were specifically singled out in the Budget (namely, Health and Aged Care, Infrastructure, Agriculture, Aviation and Tourism), there was no single package of measures announced to support technology industry businesses. However, there were a couple of small surprises on Budget night that will benefit the industry.
The lack of direct support for the startup technology Industry is a missed opportunity, especially to leverage the higher investor confidence we’ve seen in the market since earlier this year. Support for startup accelerator programs or better communication of the Early Stage Innovation Company Investor tax concessions would have been timely.
Below, we’ve set out the new measures, together with a refresh of existing measures from last year’s Budget that support Victoria’s technology industry businesses.
The new measures
Patent Box tax concession:
This is a new income tax incentive which will be designed to apply to companies:
a. With Australian medical and biotech patents which were applied for after 7.30pm on
11 May 2021, and
b. To income generated by those Australian patents from 1 July 2022.
Corporate income generated from the exploitation of these Australian patents will be taxed at 17%, rather than the 30% (large business) or 25% (small/medium business) corporate tax rates.
The government is also considering expanding this tax concession to Clean Energy technology.
We think this is a great measure and would love to see it expanded to other types of technology.
It will also be interesting to see how the design of this incentive considers global tax competition and the shift towards a system of standard global tax rates. Existing Patent Box concessions in other countries should provide some insight on the design features.
Minor changes to Employee Share Scheme (ESS) rules were announced to:
a. Remove the ‘cessation of employment’ tax trigger for ‘tax deferred’ schemes (from the first year after date of Royal Assent). To put this change into perspective, under the current ESS rules, employees are taxed on their equity entitlements when they change jobs, regardless of whether the employee has enough cash to pay the tax or the relevant equity entitlements can be sold. In effect, this taxing point can act as a penalty to leaving employment regardless of whether the employee is a ‘good leaver’ or ‘bad leaver’. Removing this ‘cessation of employment’ taxing point effectively puts the disincentive for leaving employment solely into an agreement between the employer and employee.
b. Remove and streamline regulatory requirements for plans based on whether the plan does or does not include a ‘loan funding’ or ‘employer charge’ component. This announcement is very low on detail and only talks about simplifying disclosure and other regulatory requirements. In our opinion, the Government should be looking at ‘switching off’ the punitive Division 7A, FBT and share buy-back rules which apply to private businesses which offer loan funded plans. Whether or not the Government will go this far is to be seen.
Further, the majority of the tax rules surrounding employee equity plans are still extremely complex, creating several unintended tax outcomes and uncertainty for private businesses and their employees. It would be great to see the Government recognise this and iron out the remaining issues.
Digital Business Plan
Last year’s Budget proposed a Digital Business Plan with $796.5 million to be allocated to various programs over four years. Under the 2022 Budget, the Digital Business Plan programs have been extended and funding for this package has increased to $1.2 billion over six years.
Highlights of the package include:
- Reviewing the tax incentives for Venture Capital investors. These incentives are not well known and have very limited scope
- Introducing a 30% refundable tax offset for businesses which spend a minimum of $500,000 on certain types of Australian game developers’ expenditure
- Reinstatement of a measure introduced in 2016 to allow taxpayers to self-assess effective lives of some intangible assets – applying to assets acquired from 1 July 2023. In essence, this allows businesses to choose a tax depreciation deduction period which better matches the asset’s useful life, as opposed to using the (mostly longer) statutory tax depreciation periods;
- Increasing the digital skills of Australians via various education and training initiatives
- Supporting SME businesses to adopt digital technologies to increase efficiency, via advice and e-invoicing initiatives
- Creating and supporting various Artificial Intelligence programs via oversight and education
- Supporting aviation technology initiatives
- Enhancing the Government’s digital service delivery, mainly via myGov and My Health Record improvements
- Supporting and regulating the use of data in the economy, and
- New investments to help protect Australia’s digital economy.
We look forward to seeing more details of these initiatives in the coming weeks and months.
Refresh on existing measures
R&D Tax Incentive changes
The previously announced R&D Tax Incentive benefit changes commence on 1 July 2021. Key features are:
a. For companies with annual turnover less than $20 million, the R&DTI benefit will be 18.5% above the company’s tax rate. This equates to a refundable tax credit of 43.5 cents out of every $1 spent on eligible R&D in 2022, and therefore the R&D rate remains unchanged for companies that will access the 25% company tax rate.
b. For companies with annual turnover of $20 million or more, the non-refundable R&DTI benefit will be tiered based on your ‘R&D intensity’:
- Tier 1: For R&D expenditure up to 2% of your total expenses, the R&DTI benefit will be 8.5% above your company tax rate. This equates to a non-refundable tax credit of 33.5 cents* out of every $1 spent on eligible R&D, which is lower than the 38.5% rate companies can access under the current program.
- Tier 2: For R&D expenditure above 2% of your total expenses, the R&DTI benefit will be 16.5% above your company tax rate. This equates to a non-refundable tax credit of 41.5 cents* out of every $1 spent on eligible R&D above 2% intensity, which is higher than the current 38.5% rate and so incentivises companies to increase R&D intensity above 2%.
For larger businesses, eligible R&D expenditure will be capped at $150 million per year.
*Assuming a 25% company tax rate.
Grants and other support
The Government announced funding for several broader programs that will support businesses in the Technology industry.
- Modern Manufacturing Initiative: $1.5 billion allocated to various programs over five years, which we hope will extend to supporting technology businesses connected to ‘modern manufacturing’. Note, the first round of Manufacturing Integration Stream grants closed in April 2021.
- The JobMaker hiring credit is still available to employers who hire new employees aged 16-35 from 7 October 2020 to 6 October 2021, where those employees have recently been on JobSeeker and other Government support programs. Payments to employers are tiered as follows:
- $200 per week per eligible employee aged 16 to 29, for up to 12 months (max. $10,400), and
- $100 per week per eligible employee aged 30 to 35, for up to 12 months (max. $5,200).
- Extension to temporary full expensing of assets: This measure was announced in the 2020-21Budget and allows eligible Australian business taxpayers to claim an immediate tax deduction for certain new depreciating assets acquired and installed ready for use between 7.30pm 6 October 2020 to 30 June 2022. Qualifying SME businesses can also claim immediate deductions for certain types of second-hand assets acquired during the eligibility period.
Even better, the 2021-22 Budget has extended temporary full expensing for a further 12 months to 30 June 2023.