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Research and Development (R&D) tax concession

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The Government will introduce amendments to section 73CB of the Income Tax Assessment Act 1936 to ensure that investors cannot claim the RD tax concession for expenditure incurred to private sector tax exempt bodies unless the investors are fully at risk for that expenditure. The measure will apply from 7.30pm AEST tonight.

The measure will prevent inappropriate transfers of tax benefits. and parallels a 1992 measure applying to public sector tax exempt research bodies. It will ensure that investors receive the same taxation treatment for expenditure incurred to private tax exempt entities as is presently provided for expenditure incurred to public tax exempt entities.

Under the present taxation arrangements, investors can receive a tax deduction and a guaranteed return for expenditure to a private sector tax exempt entity irrespective of the success of the RD.

Evidence is emerging that the cost to Commonwealth revenue from syndicates involving private sector tax exempt entities is very high relative to the amount of RD actually undertaken and that growing numbers of investors are taking advantage of such arrangements. This investor interest has been motivated primarily by the prospect of earning guaranteed after-tax returns.

A simple example is attached to illustrate the type of arrangements being undertaken. The example highlights that under existing law there is a significant tax advantage provided to investors who fund research in private sector tax exempt bodies relative to other types of research bodies.

The measure will improve the operation of the RD tax concession by promoting at risk investment in projects on the basis of the likelihood of success of the RD.