Sandy Plunkett’s excellent article in Monday’s edition of InnovationAus.com, ‘Money for nothing: Australia’s dismal R&D performance‘, provided much food for thought as to what the federal government might focus on to lift our R&D performance, both absolutely and in international rankings.
The article noted that the R&D Tax Incentive (RDTI) was the subject of some implied criticism by Andrew Stevens, the board chair at Innovation, Industry and Science Australia (IISA) and Jens Goennemann, managing director of the government-backed Advanced Manufacturing Growth Centre (AMGC),
In essence, the argument goes that the RDTI is not directed/targeted at the areas of higher value-add. In other words, it’s available to all Australian companies doing R&D that comply with the definition in the tax legislation. In addition, concerns were raised that more and more companies were claiming the program and it is therefore costing taxpayers more and more.
These are the types of arguments raised by those who seek to either dramatically reform the program or to close it. Other experts respond with detailed studies that, for every dollar of revenue foregone, the RDTI is adding somewhere between one-and-a-half to two dollars to national turnover. They argue that the RDTI is doing its job very effectively.
I’m not going to resolve that debate here, but I am going to assume that the Albanese government wants the RDTI to continue and to work better. I should disclose that I have assisted companies with R&D tax claims since 1987. So I’d like to offer some cheap and cheerful ways we can achieve this improvement to the RDTI without spending any additional money:
Promote RDTI through existing channels
The government’s online guidance material and monthly updates fail to show how companies can use the RDTI in their businesses and what the actual benefits are. The guidance material is too often geared to what doesn’t qualify, rather than promoting the types of activities that should be claimed.
The monthly bulletins contain facts and deadlines and articles that have no direct relationship to the RDTI. The good news stories about companies making use of the program are always run as the last item in each bulletin.
You’ll see the government’s voice regarding the program reflected in InnovationAus.com when taxpayer alerts have been issued or if the government wins a court decision. When the government loses a case, it’s radio silence.
Yet these decisions are equally important in helping all the market, including AusIndustry and the Tax Office, better understand how to use the program legally and effectively.
The government’s voice has been way too muted for far too long and we need to flip the emphasis. Good stories and commercial guidance should be given due prominence.
The clarion call needs to be that we want Australian companies maximising their RDTI entitlements and adding to the national R&D stock. Its voice has been way too muted for way too long.
Growth is good
In 2015, four years after the introduction of the RDTI, program participation had increased from 8,000 to 15,000 registrants and the cost of revenue was approaching $3 billion.
Three events sent the program in the opposite direction in the next four years: introduction of an annual company group claim cap of $100 million (increased in 2021 to $150 million); an administrative crackdown on what constituted eligible R&D executed by the regulators that was ultimately shown to be too narrow an interpretation by the courts (this applied particularly to the IT sector, where the most rapid R&D growth was occurring); and the introduction of Coalition program cuts that ultimately never made it out of the Senate Economics Legislation Committee.
As a result, by 2020 the RDTI had lost a third of its user base, and the cost was heading back towards $2 billion revenue foregone.
Thankfully, all these matters have been resolved and the program has returned to a period of steady growth.
In 2022-23, the number of registrants was likely to have exceeded 13,000 and the program cost should have been approaching $3.2 billion. In other words, participation levels and costs similar to eight years ago.
This means that the program can hardly said to be overheating. In real terms, the support it offers appears to be still down on the 2015 amount. These figures should be a call to arms that we need to keep this trend going so that the RDTI can make a more meaningful contribution by more eligible companies claiming more eligible R&D.
Leverage the stability of eligibility criteria
Despite the travails summarised above, it’s a fact that the definitions of R&D activities and expenditures have remain unchanged since their introduction in 2011. This gives an almost unprecedented level of stability and certainty to a government support program.
This means that companies can claim with confidence as the 2015-19 crackdown is put increasingly in the rear-view mirror.
Embrace the legacy
Since Senator John Button introduced the predecessor R&D Tax Concession in 1985, R&D tax incentives haven’t just distributed tax benefits to thousands upon thousands of Australian companies. It’s been a change agent for our innovation culture.
To go back to a simpler time, it was the first reason to have the engineers and the bean counters sit on the same side of the work canteen. Yet, the power of the program to fuel innovation activity and Australian R&D performance has been constantly derailed in the past by politics, administration and corporate practice.
2024 represents an opportunity that we should not miss. The RDTI is stable, certain, affordable and growing. We should leverage this platform to the best of our collective abilities. Throwing all the cards up in the air and starting again would be folly.
Kris Gale is a leading expert on the R&D Tax Incentive, and is chair at R&D tax advisory Michael Johnson & Associates.
Do you know more? Contact James Riley via Email.