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A fresh take on R&D tax incentives


In light of concerns that the research and development tax incentive is being taken for a ride, the government has promised an overhaul to the scheme. What changes can we expect to see?

By Thomson Reuters Tax and Accounting Team13 minute read

In the wake of the mining boom, Australia is boosting efforts to 'mine the smart economy', with a promise to overhaul the $3 billion Research and Development (R&D) Tax Incentive in the May budget.

Treasurer Scott Morrison has revealed the new-look incentive will be aimed at “generating maximum benefit for the economy and the Australian public”.

“It is not about writing blank cheques to everyone that has a good idea,” Morrison told the AFR Banking and Wealth Summit earlier this month.

“This incentive has been taken for a ride by some and integrity needs to be restored.”

What is the R&D incentive?


The Federal Government believes R&D is a key factor in driving innovation, productivity improvements and economic growth. So it offers an incentive to boost R&D investment by reducing the cost to business.

To that end, tax offsets are available for up to $100 million of eligible expenditure per financial year.

Currently, businesses with an aggregated turnover of less than $20 million per annum can claim a 43.5 per cent refundable tax offset. For those generating more, a non-refundable 38.5 per cent tax offset is available.

How has it been “taken for a ride”?

Eligibility for the program is self-assessed. In 2014-15, more than 15,000 businesses claimed support, costing the government about $3 billion.

In December 2015 the government launched an independent review into the incentive, with a remit to identify opportunities to improve the program's effectiveness and integrity, and encourage more R&D.

The government's long-awaited response to that review, the R&D Tax Incentive Review report, will be unveiled in the May budget (20 months after the findings were released for feedback).

The ATO, meanwhile, last year launched a crackdown on businesses “misusing” R&D tax breaks.

ATO Deputy Commissioner Michael Cranston said the blitz would identify businesses and advisers that were incorrectly including ordinary business activities.

“We are seeing some businesses in these industries and their advisers improperly applying for the tax incentive,” Cranston said.

He said ordinary business activities were not usually aimed at generating new knowledge, and yet the ATO was seeing claims that “encompass whole of projects … and where the activities use existing knowledge and expertise”.

What could a new-look incentive look like?

The government has indicated the reformulated incentive will respond to the six recommendations made by the R&D Tax Incentive Review report.

This could mean an:

  • Introduction of a 1-2 per cent intensity threshold, so that “only companies directing a specified percentage of their total business expenses to R&D would begin to receive the non-refundable tax offset”.
  • $2 million cap on the annual cash refund payable.
  • $40 million lifetime cap on the refundable amount.
  • Collaboration premium of up to 20 per cent (for the non-refundable tax offset) for businesses working with Australian research institutions.

The potential impact

The business community will be keenly awaiting the May budget's final decision.

KPMG has warned that the companies most likely to be adversely affected by changes are those that “have an aggregated turnover of $20 million-plus and which spend 1 per cent or less of their annual total expenditure on R&D, or [those that] have an aggregated turnover of less than $20 million and which receive refunds in the millions”.

Ernst & Young (EY) added that startups, which incur high R&D costs prior to earning any significant income, could be “harshly penalised” by the introduction of a $2 million cap.

“A cap has the potential to introduce an innovation support cliff just at the valley of death for innovative small businesses,” EY stated.

Potential beneficiaries include research institutions and those who collaborate with them, as well as taxpayers and the budget bottom line.

As Treasurer Morrison said: “Our focus is to relaunch an R&D tax incentive that is all about R&D additionality, things that would not have happened anyway, and rewarding the intensity of that effort”.

More than 100 businesses, research institutions and member organisations made public submissions to the review report, with concerns raised by the Minerals Council of Australia, Chartered Accountants Australia, and the Australian Advanced Manufacturing Council, among many others.

Medical technology and pharmaceutical companies — which generates $4.4 billion gross added value to the economy — will be especially anxious to see the budget night announcement.

AusBiotech CEO Glenn Cross has called for a clamp-down on misuse of the program, rather than a redesign, saying any changes would impact the economy.

“This cap is going to wind back the 5 per cent annual growth Australia is achieving in clinical trials and the related jobs that we have seen in Australia since the scheme began,” he said.

Implications for broader tax policy

The move to refine the R&D Tax Initiative fits well within the Turnbull government's narrative around the need for cuts to corporate tax rates.

The pledge to progressively reduce the tax rate for all companies to 25 per cent by 2026–27 (first introduced in the 2016 budget) has stalled in the Senate, but it's never far from government messaging.

This latest announcement around R&D is being tied to the broader government agenda — however futile this electoral term — for major tax reform.

Speaking of the promised changes to the R&D incentive, Treasurer Morrison said: “One of the problems with having a higher tax rate, [is] it encourages the mining of tax incentives by large firms.”

“But lowering the tax burden on business should not be achieved by allowing arbitrary use of tax incentives, it should be done by cutting the rate.”

Stay tuned

As for how exactly the R&D incentives, tax and economic outlook will take shape, we'll have to wait until budget night.

By Thomson Reuters tax and accounting team

A fresh take on R&D tax incentives
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