Mixed reviews for ‘ludicrous’ R&D changes

Denham Sadler
National Affairs Editor

The government’s plan to shave $1.8 billion from the Research and Development Tax Incentive is “ludicrous” and shows “very little thinking” has been done since its original plan was sent back to the drawing board, BDO R&D tax partner Nicola Purser said.

Treasurer Josh Frydenberg on Thursday reintroduced to the lower house a series of changes to the research and development tax incentive (RDTI), first flagged in the 2018 budget. The government had attempted to pass the legislation earlier this year but was blocked by its own Senate committee, which called for more work to be done to get them right.

The legislation has some minor changes to what was previously introduced to Parliament, but the most significant alterations to the popular scheme remain: an increase of the expenditure threshold to $150 million, a $4 million cap for smaller companies and a new “intensity measure” for larger firms.

R&D Tax Changes are a big problem

The latest iteration pushes back the start time for the changes to the 2019-20 financial year, and makes a small change to the way the intensity measure is calculated.

The Senate committee had been most concerned with this new way to measure the size of the tax offset for firms with annual turnover of more than $20 million, and the plan to apply the changes retrospectively.

Ms Purser said that “very little thinking has been done” on the legislation since it was scrapped earlier this year, and the Coalition has not listened to industry or its own senate committee.

“In an environment where the government has publicly recognised that Australia’s business spend on R&D is falling, it seems ludicrous that it would seek to implement measures to disincentivise companies to undertake R&D in Australia vis a vis other jurisdictions,” Ms Purser said.

“The vast majority of Australian companies that produce goods, whether that be from manufacturing, agriculture or mining will be even worse off under the proposed measures, than under those that were parked earlier this year.”

The introduction of the “intensity measure” to determine the tax offset for larger firms raised a series of concerns during consultations earlier this year. The measure will be calculated by dividing a company’s R&D expenditure by its total expenses. The government had previously planned to use a company’s total expenditure instead.

There will now also be along three tiers to these measure rather than four. These are the only changes made to the controversial intensity measure from the original legislation.

This measure is “unnecessarily complex” and would put local Australian companies at a disadvantage globally, Ms Purser said.

“The committee considered that as currently drafted, the proposed intensity measure has possible unintended consequences that may disadvantage a range of Australian R&D entities,” she said.

“It’s astounding that following the senate committee’s conclusions, the intensity measure, albeit slightly modified, remains a key piece of the proposed changes to the RDTI.

“It can only be assumed that the measures will disincentivise Australia’s miners, manufacturers and agribusinesses from accessing the program and therefore are not targeted at increasing R&D but are being introduced purely as a cost-saving measure.”

The government’s attempts to reform the RDTI illustrate the “dangers of trying to micromanage an open-ended tax incentive scheme”, UTS Innovation Council chair Professor Roy Green said.

“While an in-principle tightening of eligibility requirements to exclude ‘business as usual’ is welcome, the complexities involved in their detailed implementation will be a disincentive to many firms which may otherwise be keen to access the scheme,” Professor Green told InnovationAus.

The $1.8 billion in planned savings from the changes should be directly reinvested back into local research and development, Professor Green said.

This was a core recommendation from a government-commissioned report into the RDTI and Innovation and Science Australia’s own recommendations, but has been rejected by the Coalition.

“We are justified in asking what the point is of doing this if the savings are simply to be banked,” Professor Green said.

“Surely as R&D spending by both government and business in Australia is in damaging decline, the public policy imperative should be to redirect these savings to targeted research and innovation programs aimed at reversing this decline and enabling the industrial transformation required to underpin long-term growth and jobs.”

StartupAUS chief executive Alex McCauley was more supportive of the legislation, saying it presented an opportunity to create more room in the scheme for early-stage startups conducting high-intensive research and development activities.

“Our hope is that changes like this that can help keep targeting the program to high value R&D being done by R&D-intensive companies will help create the space in the program to make sure that software development is explicitly supported, and to make sure we get the treatment of software right,” Mr McCauley told InnovationAus.

“It might help create some space to reaffirm the place of software in the R&D process. The changes are good if they target the scheme more effectively towards R&D intensive companies, but only if we use the retargeting to help support really high-value R&D.”

The government has said the changes are an effort to ensure taxpayers’ money is “well targeted by encouraging companies to invest a higher proportion of business expenditure on R&D”.

“It is crucial that funding provided is fiscally sustainable and encourages business to back themselves to be a key driver of new ideas, products, services and jobs,” Mr Frydenberg and industry minister Karen Andrews said.

“These reforms are an important step in supporting private investment in research and development and enables Australian businesses to create more and better paying jobs whilst remaining globally competitive.”

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