Denham Sadler
February 12, 2019

Delayed reaction to R&D changes

R&D Tax Incentive

Delayed reaction to R&D changes

Josh Frydenberg: Has accepted the committee recommendation to shelve the RDTI bill until further work is done

The government backdown on controversial changes to the R&D tax incentive is a relief to the Australian tech sector, but the crucial scheme was still in a “shambles” and the ongoing uncertainty would hurt businesses, according to StartupAus chief executive Alex McCauley.

A government-led senate committee tabled its report on the legislative changes to the R&D tax incentive (RDTI) on Monday afternoon after a four-month inquiry.

The report called on the government to “defer consideration” of its own bill until “further examination and analysis of the impact is undertaken”.

The government had introduced legislation to Parliament making a $2.4 billion cut to the RDTI through a number of changes to the popular scheme.

The delay has been welcomed by the tech sector, but there are concerns that the ongoing uncertainty surrounding the scheme will negatively impact businesses, and that the committee’s recommendations don’t go far enough.

The committee specifically called on the government to rethink applying the changes retrospectively to Australian companies with annual turnover under $20 million, and the “intensity measure” used to calculate refunds for larger firms.

The government has agreed to these recommendations, meaning the contentious changes won’t be passed before the upcoming federal election in May.

Treasurer Josh Frydenberg confirmed that the government would accept the committee’s recommendation to put the RDTI legislation on hold.

“The Senate Economics Committee report concluded that RDTI reform is needed. We agree with the committee’s recommendation that Treasury consider technical refinement to implementation,” Treasurer Josh Frydenberg told InnovationAus.com in a statement.

While the delay was welcome news, the continued uncertainty on the RDTI was damaging local companies, Mr McCauley said.

“It doesn’t change the fact that companies all around the country are confused about what’s going on with this really important program,” Mr McCauley told InnovationAus.com.

“We’ve got big changes hanging over the scheme, and a ‘crackdown’ on claims continuing unabated. It’s a real shambles at the moment and it’s hurting businesses,” he said.

“We need to step back and have a conversation as a nation about why R&D is so critical to our future prosperity. Then we can look at how we encourage more R&D across the economy, rather than trying to find savings in R&D programs.”

The wider tech and startup sectors are pushing for more significant changes to the legislation though, with calls to make it more friendly to companies making software-related claims.

While the government appears unlikely to embrace these calls, the Labor Party may well be in government by the time the legislation is reconsidered by Parliament.

The delay is an opportunity to address Australia’s falling levels of investment in research and development, Square Peg capital co-founder Paul Bassat said.

“I’d love for us to look at the whole picture. We as a country don’t spend a lot on R&D –Australia’s spend on R&D by the business sector is pretty low by OECD standards, and if you drill down further and look at how much businesses in Australia spend on software as a key component of that, we’re in the third or fourth lowest,” Mr Bassat told InnovationAus.com.

“That’s a real cause for concern given how many important problems in the world are solved by software,” he said.

“We need to look at the levers on why R&D spend is low and getting lower, and look at the whole issue holistically. This is a good opportunity to do that post-election, either with a new government or the current government.”

The government’s legislation would have “put a handbrake on innovation in Australia”, and more needs to be done to foster R&D in Australia, BioMelbourne CEO Krystal Evans said.

“Now is not the time to be looking for budget savings from R&D support programs, particularly when other countries in our region are increasing their commitment to supporting R&D,” Dr Evans told InnovationAus.com.

“We want to ensure that we’re able to incentivise additional R&D activity, to develop the intellectual property that comes out of our medical researchers and our universities,” she said.

“It’s something that we could all agree is to the benefit of the Australian economy and the Australian people.”

While the uncertainty that the further delay creates is troubling, it’s better for Australian businesses than the legislation passing as it is, Research Australia head of policy Greg Mullins said.

“Uncertainty is always unhelpful in this place, but that’s less damaging than these measures going through as they are."

"We’re going to have to wait and see whether it makes it back into the next Parliament, and what priority is given by a potentially incoming Labor government,” Mr Mullins told InnovationAus.com.

Research Australia has been particularly critical of the government’s proposed intensity measure to determine the size of refunds for companies with annual turnover of more than $20 million, and Mr Mullins welcomed the committee’s focus on this issue.

“We recognise that the RDTI needs to be sustainable and we want it to support research-intensive businesses that are trying to commercialise work, but we have a real problem with the intensity measure,” he said.

“We don’t think that this was going to be workable, and we’re pleased the committee has called that out,” he said.

The senate committee received 75 submissions and held three public hearings, with the vast majority of respondents rejecting the proposed changes, raising concerns of companies relocating overseas.

Politicians from both sides of the aisle need to commit to making efforts to increase research and development in Australia, not crackdown on it, Mr McCauley said. Labor has previously committed to double Australia’s R&D output by 2030 if it wins the upcoming federal election, to 3 per cent of GDP.

“That’s an ambitious goal, but it’s achievable. If we get there, it will be to the great benefit of every Australian. But we’ll need to heavily invest in R&D, both within research institutions and within companies commercialising new products.

"We need to be looking at how to stabilise and grow the R&D tax incentive, not pare it back,” he said.

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