Last week, the Federal Government released a report of its review of the R&D tax incentive (https://www.business.gov.au/assistance/research-and-development-tax-incentive/review-of-the-randd-tax-incentive). The review was commissioned as part of the Government’s National Innovation and Science Agenda and was informed by submissions and consultations with leaders of business and research.
The review was conducted by Chairman of Innovation Australia, Mr Bill Ferris AC, Chief Scientist, Dr Alan Finkel AO, and Secretary to the Treasury, Mr John Fraser. The review panel was tasked with reviewing the current $3 billion programme to identify opportunities to improve its effectiveness and integrity, including considering how its focus could be sharpened to encourage additional R&D in Australia.
Overall, the review found that the current R&D tax incentive program falls short of meeting its stated objectives of additionality and spillovers (e.g. the programme seeks to encourage additional R&D (additionality) that benefits others (spillovers)). The panel made the following six recommendations for improvement:
- More guidance on the definition of ‘R&D’ – Retain the current definition of eligible activities and expenses under the law, but develop new guidance, including plain English summaries, case studies and public rulings, to give greater clarity to the scope of eligible activities and expenses.
- 20% extra non-refundable tax offset for public research organisations - Introduce a collaboration premium of up to 20% for the non-refundable tax offset to provide additional support for the collaborative element of R&D expenditures undertaken with publicly-funded research organisations. The premium would also apply to the cost of employing new Science, Technology, Engineering and Mathematics (STEM) PhD or equivalent graduates in their first three years of employment. If an R&D tax threshold was introduced (see recommendation 4 below), companies falling below the threshold should still be able to access both elements of the collaboration premium.
- $2 million cap on refundable R&D tax offsets - Introduce a cap in the order of $2 million on the annual cash refund payable under the R&D tax incentive, with remaining offsets to be treated as a non-refundable tax offset carried forward for use against future taxable income.
- R&D expenditure threshold for non-refundable offset – Introduce an intensity threshold in the order of one to two per cent for recipients of the non-refundable component of the R&D tax incentive, such that only R&D expenditure in excess of the threshold attracts a benefit.
- Increase the maximum R&D expenditure threshold - If an R&D intensity threshold is introduced, increase the expenditure threshold to $200 million so that large R&D-intensive companies retain an incentive to increase R&D in Australia (this is double the present threshold).
- Improve the administration of the R&D tax incentive - That the Government investigates options for improving the administration of the R&D tax incentive (e.g. adopting a single application process; developing a single programme database; reviewing the two-agency delivery model; and streamlining compliance review and findings processes) and additional resourcing that may be required to implement such enhancements. To improve transparency, the Government should also publish the names of companies claiming the R&D tax inventive and the amounts of R&D expenditure claimed.
Overall, the recommendations seek to respond to the fundamental objectives, and the long term sustainability, of the R&D tax inventive programme. Similarly, although Australia is often criticized for conducting too much ‘R’ and not enough ‘D’, it remains vital for research to remain a focus, and the recommendations appear to be aligned with this position.
However, the proposed changes have received a mixed reception from industry stakeholders since their release last week and there is an ongoing risk that the proposed changes could give rise to further investment uncertainty in Australia. In particular, concerns have been expressed amongst the biotech community that the changes will have a negative impact on local clinical trials, and may deter overseas companies from conducting clinical development in Australia, a jurisdiction which has long been recognised for the clinical trial incentives it currently offers. Specifically, the introduction of a $2 million cap on refundable tax offsets may mean that foreign companies are no longer able to justify establishing operations in Australia. The startup community has also responded with concerns that the recommendations are targeted to benefit larger multinational corporates, and more needs to be done to support early stage businesses in their research projects.
The Government has asked for submissions by 28 October 2016, although it will not make a final call on the proposed recommendations until March 2017. In the meantime, companies operating within the space should assess the potential impact of the proposed changes may have on their business in order to be ready to comply with the revised programme following its implementation.