The government’s plan to give the research and development tax incentive a $2.4 billion haircut has hit a roadblock, with its own senate committee calling on the legislation to be put on hold until a series of changes are made.
With just two sitting weeks left, this effectively means that the changes will not be passed by Parliament before the upcoming federal election in May, assuming the government accepts the report.
The Economics Legislation Committee tabled its report on the legislation provisions surrounding the research and development tax incentive (RDTI) on Tuesday afternoon after a four month inquiry.
In its report, the government-led committee recommended the Senate “defer consideration” of the bill until “further examination and analysis of the impact is undertaken”.
The committee is chaired by Liberal Senator Jane Hume and has a Liberal majority. Its report was unanimous, with support from participating Labor and Greens senators.
With just two sitting weeks left until the May federal election, the committee’s roadblock means it’s all but certain that the changes will not be passed before a potential change in government, assuming the Coalition accepts its own recommendations.
The legislation has not been listed for debate by the government during the first sitting days of the year this week.
The committee has sent the government back to the drawing board to specifically reconsider whether the changes should retrospectively apply to smaller companies and the intensity measure used to calculate the refund for larger firms.
Shadow innovation minister Kim Carr, who participated in the inquiry, said the unanimous report demonstrates the level of opposition to the legislation.
“The draconian measures this government has proposed have now been clearly rejected – there was so much widespread opposition to what the government was trying to do,” Senator Carr told InnovationAus.com.
“It speaks volumes that this is a bill that the senate committee where the government has the majority is recommending now not proceed in its present form.”
“There was such an overwhelming body of evidence from industry to say that these proposals should be rejected and would have such serious adverse effects on Australia’s national interest. The question now is will the government accept the committee report? That needs to be established.”
The legislation, first announced by the government in last year’s budget and introduced to Parliament in September, implements a $2.4 billion cut to the scheme through a number of amendments.
These include a $4 million cap on annual cash refunds for companies with annual turnover of less than $20 million, with refundable tax offsets to be then calculated as 13.5 percentage points above the claimant’s company tax rate, and an “intensity measure” to determine the size of the offset for larger companies.
The legislation also raises the expenditure threshold from $100 million to $150 million.
Through three public hearings and 75 submissions, the senate committee received an overwhelmingly negative response to the proposed changes, with concerns they would force companies to relocate overseas, and particularly disadvantage tech firms.
“A significant number of submitters commented that the RDTI scheme, to date, had a positive impact on their business; however, should the proposed legislation by enacted, some indicated that they would need to consider either reducing their R&D effort or relocating it to another country where there is a more accommodating RDTI scheme,” the report said.
The government had planned to make the series of changes retrospective and apply from 1 July 2018, but the committee heard that this will “disrupt current and future investments in R&D activities that have already been schedule”, and that the smaller companies impacted by the changes “have not had enough time to plan” for them.
“The Committee acknowledges the concerns voiced during the inquiry that some R&D entities affected by the bill have expressed about the retrospective application of the bill, which may have the potential to disrupt investments in R&D activities that have already been scheduled,” the report said.
It stated that the $4 million cap “could benefit from some finessing to ensure that R&D entities that have already made investment commitments are not impeded unintentionally”, and the bill should not be passed before these changes are made.
The senate committee also took particular issue with the “intensity measure” that would calculate the tax offset for companies with annual turnover of more than $20 million. Under the current legislation, this would be calculated by dividing a company’s expenditure on R&D activities by its total expenses for the income year.
Several submissions to the inquiry said this new measure would “likely add complexity, regulatory burden and uncertainty”, and the committee agreed that it may have “unintended consequences for larger R&D entities undertaking eligible R&D activities”.
“In particular, the committee notes the possibility that businesses that manufacture in Australia may be disadvantaged compared with businesses that manufacture overseas,” the report said.
“The committee considers that, as currently drafted, the proposed intensity measure has possible unintended consequences that may disadvantage a range of Australian R&D entities.”
“Therefore, the committee agrees that the intensity measure should be re-examined in order to ensure that Australian businesses are not unfairly disadvantaged,” the report said.
The government should “refine” this measure while noting “inherent differences in R&D intensity across industries and impacts on businesses with large operating costs”, the committee recommended.
The report also acknowledged broad criticisms that a collaboration premium was not included in the legislation, and that the money shaved from the scheme won’t be reinvested in research and development-focused activities.
The RDTI is now likely to become an election issue, with Labor accusing government of “wrecking” the scheme. The Opposition has pledged to “preserve” the RDTI, but is yet to confirm whether it will support the government’s changes.
Even with the changes proposed by the committee, there are better ways to implement the policy, Senator Carr said.
“We’ve made it clear that we think there are better ways to do this. Even if you accept the budget savings measures there are much, much better ways to secure in policy terms a better outcome for industry and for individual companies,” he said.
The delay in passing the legislation will relieve many in the tech and startup sectors that have been highly concerned about the potential changes.
Industry representative body StartupAus said the changes pose a “critical risk” to the startup sector, and that the issue is now “life or death” for the industry. The sector is calling for many more changes to the RDTI reforms than proposed by the committee, or for the legislation to be scrapped entirely.