Backlash at R&D tax changes
Tax stand-off: Flipping the BERD at the proposed R&D tax incentive scheme
Controversial changes to the R&D tax incentive are “ill-advised” and would do “untold damage to large sections of the Australian innovation community”, according to submissions to a Senate inquiry.
A number of submissions, from a range of research institutions and technology companies, call on the senate to reject the changes to the R&D scheme.
Major tech companies – including MYOB –said that they may be forced to look offshore for further expansion if the changes come into effect.
They outline numerous concerns with the proposed changes and how they would impact tech companies in Australia and the broader innovation ecosystem. Several claim they may force some companies to move offshore, and put Australia further behind the rest of the world.
A senate committee is currently holding an inquiry into the creatively named Treasury Law Amendments (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018. Included in the “other measures” are the much-anticipated changes to the R&D tax incentive, a scheme that is especially popular among tech startups.
As announced in this year’s budget, the government plans to cut $2.4 billion over four years from the scheme through a range of amendments to it. These include a $4 million cap on annual cash refunds for companies with annual turnovers of less than $20 million.
For these companies, the refundable R&D tax offsets would be calculated as 13.5 percentage points above the claimant's company tax rate.
For larger companies with annual turnover of at least $20 million, the new rules impose incremental rates for the offsets based on the proportion of the company’s expenditure going towards R&D, dubbed the ‘intensity’ measure.
With business investment in R&D in decline in Australia, the reasoning behind these changes is no longer valid, health and medical research sector body Research Australia said in its submission.
“Research Australia is supportive of the RDTI in its current form and opposes several of the proposed amendments. Research Australia submits that with expenditure on the RDTI scheme failing to meet the earlier projections which precipitate concerns about the escalating costs of the scheme, much of the rationale for the amendments contained in the bill is no longer valid,” the submission said.
“In an environment in which private sector R&D is declining, this lack of commitment to private sector R&D is a significant concern.”
In its submission, accounting software giant MYOB hinted that it may relocate its expansion plans to a country with a more favourable scheme, such as New Zealand.
“If the bill is enacted, MYOB would have to consider other options for best financial result,” the company wrote in its submission.
“While presently our assumption has been that the vast majority of this investment will be spent in expanding our engineering teams in Melbourne and Sydney, we have the option to shift investment in R&D activities to other locations where greater benefits could be obtained.”
In its own submission, 2cloudnine chief executive Adam Edmondson said that the software company wouldn’t exist today without the R&D tax incentive, and may also be forced to relocate overseas if the changes are legislated.
“The R&D tax incentive has had a significant positive impact on our company’s ability to invest in R&D and innovation and has resulted in incremental jobs and revenue throughout the R&D and commercialisation processes with opportunity for further significant growth in jobs and revenue in the very near future,” Mr Edmondson said in the submission.
“Without the R&D program we would not be in business today and therefore would not be in a position to be considering such tremendous growth opportunities ahead. With our business the government’s return on the R&D incentive paid to us will be paid back many times over.
“In the event that the proposed law is enacted, we will need to consider either reducing our R&D effort or relocating it offshore to a country where there is a more generous R&D tax incentive.”
The senate committee should ask the government for better statistics on the RDTI and the number, size and value of claims made for it, Research Australia said.
“It is difficult to gauge the direct impact of this measure on companies as there is no publicly available information about how many claims for the refundable RDTI exceed this claim, or the size, industry sector or financial position of such claimants,” it said.
The new intensity threshold was also heavily criticised in the submissions, with claims it could actually encourage companies to increase operations in Australia, such as manufacturing.
“We urge the government to reconsider the proposed significant cuts to the research and development tax incentive, as we are concerned that the intensity threshold in its proposed form may lead to a significant reduction in business expenditure on R&D as a percentage of gross domestic product,” consultancy giant KPMG said in its submission.
“In terms of the overall RDTI policy direction, our fear is that the proposed intensity measure may accelerate the current negative trajectory in business expenditure on R&D, and that the 4 per cent rate would not be sufficient to represent a genuine incentive to undertake additional R&D.”
Australian-based biopharmaceutical company CSL also raised concerns with the intensity threshold, saying it may have the “unintended consequence of specifically and perversely disadvantaging businesses which conduct R&D and manufacture in Australia”.
“Companies which invest significantly in R&D but are also large Australian manufacturers and employers will have a lower intensity compared to a company which only conducts R&D in Australia and manufactures offshore, or is engaged in an industry which does not have high raw material and production costs,” CSL’s submission said.
“We do not believe this is the government’s intention but it will be an unintended outcome of this formulate which values the same dollar value of R&D expenditure differently but, we would argue, not appropriately.”
The introduction of the intensity test will to “untold damage to large sections of the Australian innovation community”, HorizonOne Consulting said in a submission.
“I believe that the non-refundable offset in its current form will be the single worst change in the more than 30 year history of the program. The government needs to urgently reconsider the offer it is making to this sector,” HorizonOne said. “At 4 per cent for most of the adherents, you won’t be driving innovation behaviour. You will be driving companies out of the program.”
“The introduction of the R&D intensity measure will just mean that we will be building a bigger hole as thousands of Australian companies face effective exclusion from the government support framework.
“This proposal is legislating a significant decline in BERD which will see Australia slipping further behind in the global innovation drive.
“It has always been a design element of the program to direct more benefits to smaller taxpayers, however the intensity measure will be doing the exact opposite.”