The Treasury formula used to calculate the true cost of the program seemingly overlooked the non-tax deductibility of eligible R&D expenditure, leading companies to relinquish a 30 per cent tax deduction. Stephen Carroll of RSM Australia’s tax services division is therefore calling for a more realistic discussion, tabling the best mix of measures for an R&D tax incentive program.
“The biggest concern is that government will take the knife to R&D tax incentives at a time when there’s substantially more funding to go around,” said Mr Carroll.
Based on RSM Australia’s response to the R&D tax incentive review, much of the inconsistency in Treasury’s costings relate to a discrepancy in the calculation of the refundable R&D tax offset.
According to RSM Australia's numbers, the budget cost of the refundable tax offset should be close to 15 per cent of R&D expenditure, rather than the review’s rate of 45 percent.
“Treasury’s assumption that many 45 per cent claimants aren’t profitable SMEs, and failure to factor in future tax benefits, resulting from companies moving into profit – hence paying higher tax – artificially inflates the cost of the program,” says Mr Carroll.
“The magnitude of Treasury’s modelling oversight is good news for the R&D innovation."
“The $1 billion that RSM, together with other firms have effectively discovered for Treasury, not only shelves government concerns about constraining R&D tax benefits – following what they thought was a cost blow-out – but means there’s more to invest in significantly expanding the program,” he said.
Mr Carroll warned that overtures by government to limit the scope of eligible core R&D activities, based on Treasury's modelling, could be disastrous.
"The government should model the loss of R&D activities, from Australia to overseas, that would occur if the R&D tax incentive were degraded, as additional R&D that’s currently being undertaken," he said.
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