The Opposition is “profoundly concerned” with the revamped research and development tax incentive intensity measure and has also called for the introduction of a collaboration premium.
Legislation making a series of changes to the research and development tax incentive (RDTI) passed Parliament last week just days after it was announced by the federal government in the budget, with support from the Opposition.
The reforms are a significant back down from the government’s previous plan to cut $1.8 billion from the RDTI through a number of changes, including a $4 million cap on claims for small companies and a complex intensity measure for larger firms.
Legislation implementing these previous plans stalled in Parliament and had been the subject of a Senate Economics Legislation Committee inquiry for nearly a year. Despite the legislation now being obsolete, the committee still tabled its report into the bill this week.
While it’s mostly going through the motions with the bill in question now having been superseded by new legislation already passed by Parliament, Labor Senators did make some dissenting comments on the new reforms outlined in the budget.
Most significantly, the three Labor Senators on the committee raised serious concerns with the simplified two-tiered intensity measure that will be in place from July next year for companies accessing the RDTI with annual turnover above $20 million.
The size of the offset for these companies will be determined by dividing their level of R&D conducted by the company’s total expenses. If this figure is between 0 and 2 per cent, the non-refundable offset will be set at 8.5 percentage points above the company’s tax rate. If it is higher than this, the non-refundable offset will be set at 16.5 percentage points above the company tax rate.
This new measure will provide “greater certainty for R&D investments while still rewarding those companies that commit a greater proportion of their business expenditure to R&D”, the government said, and will waylay concerns that the previous three-tiered approach would disadvantage local companies, especially those in the manufacturing space.
But in the dissenting report, Labor said it was still concerned about the new intensity measure which has been approved by Parliament.
“Labor Senators are profoundly concerned, however, that the government has retained the most damaging element of its 2018 and 2019 bills to restructure the RDTI: an intensity scale for calculating the non-refundable tax offset for larger firms,” the Labor Senators said.
“The reduction in the number of intensity tiers eliminates the 2019 bill’s 4.5 percent tier, which would have halved the rate for most businesses claiming the RDTI. That is an improvement, but it does not change the fact that intensity scales are a fundamentally flawed means of assessing the value of R&D activities.”
The new measure will particularly damage local manufacturing companies, the Opposition said.
“For manufacturers, the bulk of operating costs comprise wages, purchase of raw materials and equipment, and investments in the supply chain. Specific R&D activities will always be a small proportion of the total operating costs for these manufacturers, but that is no indication of the inherent value of the R&D they undertake,” they said.
“In submissions and evidence to the committee many of them warned that the introduction of an intensity scale would force them to move either their R&D or their manufacturing offshore.”
“The elimination of the 4.5 per cent tier might make it less likely that they will face such a choice, but the intensity scale continues to discriminate against Australian companies that conduct both R&D and manufacturing in Australia.
“Multinationals that can manufacture offshore and conduct R&D here will be better placed to claim the premium rate.”
In the main report, the government-led committee said the changes to the intensity measure would help retain companies in Australia.
“The committee notes that the new two-tier structure proposed in the budget should encourage greater R&D expenditure than those measures proposed in the 2019 bill. The committee considers that both these measures will assist the largest investors in R&D keeping their R&D activities in Australia,” the committee report said.
The cap on total RDTI claims, which has been increased to $150 million, will also unfairly impact manufacturing firms, Labor said.
“The government had an opportunity to lift this cap in the new measures announced this week but did not take it,” they said in the report.
“Under the impact of the severe recession brought about by the COVID-19 pandemic, putting R&D activities and manufacturing jobs at risk is hardly a prescription for recovery. Labor Senators urge the removal of the intensity scale from the RDTI.”
Labor Senators voted in support of the RDTI changes, including the new intensity scale, in Parliament last week. The changes were included in an omnibus bill with a range of budget measures and were not debated and no amendments were moved.
The Opposition is also pushing for the introduction of a collaboration premium to the RDTI, which would reward collaboration with public sector institutions with a higher level of refund.
“A far better approach to improving the RDTI would be to introduce a premium rate for collaboration between industry and research institutions. Labor Senators recommend that any future bill intended to make the RDTI work more effectively in encouraging innovation between industry and universities or public research agencies,” they said.
The main committee report included no recommendations on the now-outdated RDTI legislation, acknowledging that it had been “superseded” by the budget announcement and this was “significantly modifying the proposals it contains”.
“While many across the research and industry sector have found that the bill potentially did not hit the mark they were looking for, the committee considers that the new measure announced in the 2020-21 budget should provide significant clarity and motivation for all sectors undertaking R&D,” the government-led committee report said.
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