When Malcolm Turnbull commenced as Prime Minister, he won Australians over with his positive outlook and vision for innovation. However this week, the Government demonstrated that its mantra of innovation and an “ideas boom” has shifted substantially since 2015. This includes budget cuts to Universities and a clamping down on research and development (R&D) spending.

In this week’s G+T insight, we explore recent activities which indicate that the “ideas boom” may be limited by more than just our imagination.

Further tightening of the R&D Tax Incentive

The R&D Tax Incentive has been a primary focus of the Tax Office so far in 2017, and since last weekend, was the subject of a further promoter penalty warning. The warning was for taxpayers who include the compulsory Wine Grapes Levy (WGL) as part of their R&D claim – a tax scheme that has been promoted by “reputable brand names”, referring to advisors. The warning took many advisors and claimants by surprise, given similar contributions were approved under the R&D program previously (see for example CR 2013/35).

There have been five R&D alerts by the Tax Office so far in 2017, and it’s only May. The current Tax Commissioner has always expressed the view that companies innovate for business and commercial reasons (to make a profit), and they would whether or not there was an R&D Tax Incentive. The Tax Office alerts are indicative of this view.

The R&D Tax Incentive cost Australian taxpayer $3.17 billion in 2015 (current data lags due to the retrospective nature of the program). Registrations have exploded since 2012, up 61%. So any clamp down on Australia’s prominent R&D incentive program should reap large budget savings.

Perhaps it is this reason that the administrators (being the Tax Office and AusIndustry) have continued to pursue the R&D tax incentive as an area that has been exploited by taxpayers and advisors – any “crackdown” would result in spending cuts. Further, a crackdown by the administrators (rather than any law change by the Government) will save the Government from any embarrassing conversations about cutting spending on “innovation” and the “ideas boom”. Or alternatively, a crackdown may set the stage for budget cuts where there is perceived abuse.

There is significant uncertainty created by the Tax Office’s announcements. Start-ups cannot afford high-end tax law advice about the “grey areas”, and can seldom engage advice for defending a R&D claim in the case of a review (especially where their incremental R&D benefit is small), making them an easy target for enforcement activity.

It will be interesting to see what surprises the Federal Budget on Tuesday holds for R&D – follow our live tweets from the night as we comment on the Treasurer’s budget speech.

University spending

Also this week, Birmingham announced budget cuts to University spending – saving $2.8 billion. The measures involve lowering the loan repayment threshold to $42,000 in taxable income, decreasing the Commonwealth’s co-contribution amount for a degree by 4%, and decreasing overall funding to Universities.

Some of these measures make sense – such as pursuing the $52 billion of outstanding HELP loans (Scott Morrison: “loans have to be repaid”). Others make less sense, such as cutting spending on Universities and degrees – potentially limiting the quality and affordability of education.

At the same time, Scott Morrison continues to differentiate “good debt” and “bad debt”. Mr Morrison says “good debt” provides a return on investment, whilst “bad debt” doesn’t. With such a dichotomy, which bucket does University spending fall under? One would think that investment in people has a return on investment (ie. “good debt”), but at this stage, it certainly isn’t treated as such by the Government.

School spending

Shortly after the University spending cuts announcement, Prime Minister Turnbull changed focus with an announcement of “Gonski 2.0”. This would result in a 75% increase in spending on school education incrementally over the next 10 years.

The measure may involve a redistribution of school funding from private schools to public – and has left the Labor party speechless.

However, with the focus on getting Australia out of deficit, the question on everyone’s minds is funding. We will have to wait until Tuesday to learn more.