Tax offset to hurt small biotechs

The Federal government's 'Backing Australia's Ability' package seems to have backed right over small biotechnology companies, crushing their hopes for substantial cash rebates on their R&D expenditure.

"It's very unfortunate," said Dr Tony Coulepis, executive director of AusBiotech, the industry association representing Australian biotech companies. "The tax rebate was meant to address small biotechnology companies' [tax loss] problems, yet the very companies it is supposed to help appear to be ineligible.

"We're not sure if it's an oversight, or a hiccup, but we've written to the Minister for Small Business seeking clarification."

On September 9, AusBiotech vice-president Dr John Ballard sent member companies a letter drawing their attention to the opportunity to obtain a 37.5 cents in the dollar rebate on their eligible R&D expenditure in the 2001-02 financial year.

Ballard's original letter said the so-called R&D Tax Offset was specifically targeted to small companies in a tax-loss situation -- nearly all of them early-stage biotechnology companies -- as an alternative to the R&D Tax Concession.

He described the rebate as a "highly attractive" option because the R&D Tax Concession was useful only after companies became profitable, through increased tax deductions.

Companies would have been entitled to rebates of up to $375,000 if they:

• Already qualified for a deduction under the R&D Tax Concession provisions.
• Had a group turnover of below $5 million.
• Had group R&D expenditures totalling no more than $1 million.

In a subsequent letter to AusBiotech members on September 13, Ballard said closer scrutiny of Section 73J(2) of the Income Tax Assessment Act 1936, showed that most companies would be ineligible for the rebate.

Companies spun out of CSIRO, universities, hospitals or medical research institutes, or any other tax-exempt research agencies, were ineligible if the founding agency, or one of its commercial affiliates, retained more than 25 per cent equity in the new company.

Ballard said probably very few early-stage biotech companies would have less than 25 per cent equity held by their founding entities.

It was unclear whether the equity-exclusion test might also apply to Commonwealth funds invested in companies though venture capital funds.

Another problem was that the eligibility criteria set a limit of $1 million on annual R&D expenditure -- if a company spent one dollar above the $1 million ceiling, it would, in theory, get a zero rebate.

AusBiotech advised companies to consult their tax advisers to clarify their individual circumstances before lodging their annual income tax returns, given that each company could only claim the rebate in its original income tax return.