‘Almighty backflip’ is a welcome industry tonic

Denham Sadler
National Affairs Editor

The federal government’s attempt to spin its “almighty backflip” on the research and development tax incentive as a $2 billion investment in the scheme is a “brazen misrepresentation of the truth”, according to the Opposition.

The Coalition officially abandoned its plan to cut $1.8 billion from the research and development tax incentive (RDTI) in Tuesday night’s federal budget, scrapping a number of the most contentious changes in legislation currently before Parliament.

And the industry could not be more pleased.

Instead, the government will lift the offset rate for smaller companies and scrap plans to introduce a $4 million cap. It will also introduce a simpler two-tiered approach to determine the size of the offset for larger companies.

Lorraine Chroiu
Lorraine Chroiu: The policy change n the budget was an “important and positive shift”

Under the “enhancements”, companies with annual turnover under $20 million will have their refundable tax offset set at 18.5 percentage points about their company tax rate, with no cap. Larger companies will have their offset based on a two-tiered intensity measure, based on their R&D intensity as a proportion of total expenses.

R&D expenditure between 0 per cent and 2 per cent R&D intensity will receive an offset of 8.5 percentage points above the company tax rate, while anything higher will receive a 16.5 per cent offset.

The start date of these reforms has also been pushed back to July next year, a backtrack from previous plans to apply changes retrospectively to the 2019-20 financial year.

Legislation including the changes was introduced to Parliament on Wednesday morning as part of an omnibus bill of new budget measures.

The policy change is needed because of the ongoing pandemic, the government said.

“In light of the continuing economic consequences of the coronavirus pandemic, further refinements to the RDTI are needed to support Australian firms that invest in R&D. The refinements are intended to provide business with greater support and certainty, and in doing so support a strong economic recovery,” the explanatory memorandum said.

The announcement, a significant back-down from the government’s approach to the RDTI over the last two and a half years, has been largely welcomed by leading industry groups and figures.

The government has spruiked the announcement as being a $2 billion investment in the RDTI, but this is compared to the legislation before Parliament, which would cut $1.8 billion from the scheme, rather than the current scheme. The new changes represent a $240 million investment in the scheme without the planned cuts.

Labor is likely to wave the RDTI changes through Parliament, but industry minister Brendan O’Connor has slammed the government for spinning it as a significant investment in R&D.

“The government’s changes to the RDTI is an almighty backflip – they boast of an extra $2 billion funding for R&D tax incentives, but $1.8 billion of it already exists along with legislation proposed to cut it,” Mr O’Connor said.

“The government’s claim that this is new spending is a brazen misrepresentation of the truth. Their grand plan for research and development, so essential in the depths of this recession, is to simply restore the money that in their heart of hearts they want to cut.”

The federal government’s backflip on planned $1.8 cuts to the R&D tax incentive has been widely welcomed across industries, although concerns still remain about the new intensity measure for larger companies.

The announcement has also raised hopes that the RDTI scheme will be viewed as a job creating mechanism rather than a potential revenue-saving area.

The changes are “very welcome” and go a long way to addressing many of the concerns surrounding the RDTI in recent years, according to UTS Innovation Council chair Professor Roy Green.

“It addresses the concerns that we’ve all had about companies potentially getting greater benefits from moving R&D offshore and hopefully this will be an effective stop gap until the anticipated broader framework for research, innovation and industry policy can be devised and it’s certainly not a substitute for that broader approach,” Professor Green told InnovationAus.

“The internal changes to the operational model of the RDTI are well thought out and make accessing the incentive far clearer and more orientated to increased R&D, rather than the complex intensity test we have a much simpler tiered approach to favour increased R&D spending.”

BDO Australia R&D partner Nicola Purser said the government’s “about face” is welcome, but the retention of the “much maligned intensity measure” is troubling.

“The retention of the intensity measure for larger businesses not only adds complexity but discriminates against certain industries such as manufacturing and agriculture sectors in particular. The beauty of the R&D tax incentives as originally designed is that it is industry agnostic,” Ms Purser said.

“The tiers have been made more attractive for large companies through a significantly simplified two-tiered structure with a single realistic proposed intensity threshold of 2 percent of total expenditure above which a premium rate of R&D assistance is applied.

“It is a pty that it has taken a global pandemic and recession for the government to realise the economic benefits of encouraging investment in research and development. It is in adversity that successful businesses will invest and adapt.”

The reforms are positive but now should be brought forward and introduced now, Fintech Australia chief executive Rebecca Schot-Guppy said.

“The policy is important for fintechs’ capital runway particularly at their earlier stages and the changes will no doubt support their growth. In addition, the increased R&D spend will ensure that new innovative businesses come into our economy which will help lead our recovery,” Ms Schot-Guppy said.

“Our only concern is that the reform comes into effect on 1 July 2021. For us to have the best chance of supporting the sector through this pandemic, it needs to be introduced now.”

The policy backdown represents an “important and positive shift” in the government’s thinking about the RDTI, AusBiotech chief Lorraine Chiroiu said.

“As the most critical policy for the industry, the announcements tonight will support our leading sector by giving companies and investors the certainty they need to commercialise and deliver new, innovative treatments to Australian patients,” Ms Chiriou said.

“The announcement demonstrates the government understands how Australia’s post-COVID-19 recovery will be supported by business expenditure for research and development and has provided a welcome change of position on the RDTI that will support and incentivise growth in R&D and manufacturing as we recover from the pandemic.”

Do you know more? Contact James Riley via Email.

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