Beverley Head
November 16, 2015

R&D tax needs focused overhaul

R&D tax needs focused overhaul

Christopher Pyne: R&D scheme fault is the two armed government administration between Industry and ATO*

Consensus is brewing that Government should not scrap, but instead streamline and focus, the research and development (R&D) tax incentive scheme in order to get more bang for its buck.

With the scheme currently under review, companies are being polled by the TKW Research Group, with the Centre for International Economics also engaged, to provide advice to the Government as it prepares its tax white paper.

Earlier this year the Government capped incentive payouts at $100 million, but failed to secure the support of the Senate to cut the concession rate by 1.5 per cent. There is clearly appetite for R&D reform.

Under the current regime, companies with revenues of less than $20 million are able to claim a refundable tax offset of 45 cents in the $1 for eligible R&D. For organisations with revenues above that the benefit is instead a non-refundable 40 per cent tax offset.

There is a spectrum of opinion about the R&D scheme ranging from scrap it and replace it with grants, to streamline it under one Government body, through to leave well alone.

Speaking at the InnovationAus.com Open Opportunity forum recently, Professor Roy Green, UTS business school dean lamented the fact that “30 per cent of (government funding for) R&D goes to tax concessions which is not directed.”

Professor Green called instead for more targeted investment of Australia’s research funds, with oversight from an industry facing body rather than a Government agency.

Steve Crutchfield, managing director of Motorola Solutions, ANZ and Pacific which recently opened a Melbourne innovation centre, said that the R&D tax programme was extraordinarily important especially given the pace of change being fuelled by technology.

He said that any attempt to rein in the scheme would be a backward step for Australia. While he acknowledged that reducing the corporate tax rate might be another way to spur R&D, Mr Crutchfield said that removing the concession entirely might take decisions about where to perform research out of a local subsidiary’s hands, leaving corporate headquarters to direct where in the world research took place.

Having access to a local scheme was an incentive to local R&D he said. Not everyone agrees.

Adrian Di Marco, founder and executive chairman of local software and services company TechnologyOne, has long railed against the R&D tax concessions.

In a recent letter to the AFR Mr Di Marco said that; “I strongly believe R&D tax incentives in Australia should be abolished, as they have not been effective in creating a vibrant start-up culture.”

He said that companies like TechnologyOne did not need tax concessions to encourage R&D, and that in any case the concessions reduced the company’s ability to pay franked dividends.

Mr Di Marco also said that giving tax credits to global giants such as Google (which reportedly claimed $4.5 million from the scheme in 2013) delivered no long term benefits to Australia.

“Finally, start-ups cannot take advantage of tax credits because they are not profitable, which is why they need investors. Instead, let’s redirect funds from R&D tax credits to providing smart investors with tax concessions to actively invest in start-ups, thereby fuelling a start-up industry and having a very real, meaningful impact on Australian innovation” Mr di Marco wrote.

Gerry Frittmann, managing director of TCF Services, which specialises in assisting companies accessing Government financial schemes, said that although he often “Scratched [his] head and wondered what R&D has to do with tax,” the scheme had delivered benefits to industry and should be retained.

But Mr Frittmann said that the rising number of claimants for the concession meant it was now costing the Government $2.8 billion a year.

A problem with the scheme he said lay in the fact that it is administered by two arms of Government – the ATO and the Department of Industry, Innovation and Science – and that it relied on often flawed self-assessment.

Mr Frittmann said a more effective mechanism would be to have a single organisation deliver incentives through a grant programme, that for start ups could also be directed to the costs of patenting, structuring the business or the cost of capital raising rather than being constrained by the currently narrow definition of R&D which demands “high levels of technical risk”.

Having a grant programme would also corral Government costs. However Mr Frittmann said little scheme reform was needed for companies with revenues above $20 million.

At the other end of the spectrum are businesses such as Gridstone, a six year old software and services business with revenues of around $2 million.

Jonathan Grant, founder and CEO, said that for the past five years the company has been leveraging the R&D incentives to focus on high risk or high technology development. Without access to the incentives Grant said; “I would spend all my days raising capital.”

He said that R&D always amounted to at least 25 per cent of the company’s activities and could rise as high as 50 per cent because of the need to respond to aggressive competition in the market.

“We are literally ‘test fail, test fail,'” he said adding that about 80 per cent of the company’s projects failed – but the 20 per cent that succeeded were highly successful.

*Photo credit: Getty

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