On 11 February 2019 the Senate Committee issued a report requesting the government to defer consideration of the Treasury Laws Amendment (Making Sure Multinationals Pay Their Share of Tax in Australia and Other Measures) Bill “until the impact of these changes is better understood”.
This response was a result of a four month inquiry held by the committee in which 70+ overwhelmingly negative submissions relating to the draft legislation was received.
Approximately 13,000 companies are registered for the R&D Tax Incentive program with the majority being SMEs accessing the refundable offset. Increasing costs of the program prompted the government to seek a review of the integrity of the program and whether it was encouraging ‘additionality’ in Australia’s R&D. The result of these reviews was a bill raised in June last year which contained changes to the program including:
- capping the refundable tax offset at $4m (excluding a clinical trial carve out)
- linking the offset amount to the company tax rate; and
- introducing an ‘Intensity measure’ for larger companies linked to a varying offset amount dependent on the company’s investment in R&D.
Criticism of the bill related to the complexity in the administration particularly for larger companies, and the uncertainty companies faced with proposed investment and overseas investment into Australia. The program has seen a number of changes since being implemented in 2011 and the overall position from companies was to stop tinkering with the program to allow some business stability.
Below are the seven main areas of concern:
1. Retrospective legislation
Schedule 1 of the bill is due to apply from 1 July 2018, thus would have retrospective application which would disrupt current and future investments in R&D. Recommendations included the date of commencement be either reconsidered, transitional such as a phase in period or legislation be grandfathered to account and adjust for activities that have already been scheduled prior to the amendment.
2. Reduction of the refundable tax offset
The proposed amendment to the refundable tax offset will tie the offset rate to 13.5% above the relevant corporate tax rate which will be progressively lowered. Currently, the refundable tax offset rate is 43.5% which assumed a 30% corporate tax rate. With the reduced corporate tax rate of 27.5%, the refundable tax offset will be 41%, a reduction of 2% and net after tax benefit.
Tying the 13.5% to the company tax rate will reduce the cash flow for some SMEs company. It was noted by respondents to the committee that this not only makes Australia less competitive against other countries initiatives, but also has a direct reduction in the support provided to early stage SME’s when needed most.
3. $4 million cap
Schedule 1 proposes a yearly cap of $4 million - while significantly higher than the original recommendation of $2 million and also internationally competitive, this proposed amendment would impact a number of high intensity R&D companies who claim the refundable tax offset.
Submitters did not welcome the introduction of the cap stating it brings financial risk to the project and could create significant delays due to difficulties in raising investment from alternative sources.
4. Exemption for clinical trials ($4 million cap)
The proposed exemption from the $4 million cap for medical trials was generally welcome. However, it was highlighted that the definition did not appropriately cover activities that may be conducted now and in the future, and there is uncertainty in what costs would be covered for clinical trials.
The majority of presentations to the committee recommended that the cap and exemption to be delayed until the definition is reviewed and refined to adequately cover a range of medical interventions.
5. Increase of the expenditure threshold to $150 million
All submitters supported this measure to increase from $100 million to $150 million as a great step forward with some suggesting that placing an expenditure cap encourages companies with global capability to seek other R&D options once the amount has been reached.
6. R&D intensity calculation
The bill aims to introduce a new intensity premium for larger entities that would change the current offset such that larger R&D entities would be entitled to an offset equal to their corporate tax rate (plus marginal intensity premiums) determined with reference to the R&D intensity of their R&D expenditure.
Significant concerns were raised in relation to complexity and the possible disadvantage to companies with high operating costs such as companies undertaking manufacturing.
The minimum intensity premium for companies undertaking 0%-2% of their total expenditure on R&D, is less than half of the current 8.5% tax offset making the R&D claim process not worthwhile for these companies.
The measure was also noted to reward certain company structures rather than R&D, and that by linking the tax incentive to the value of the R&D as a percent of total expenditure may incentivise companies to reduce other expenditures, such as moving manufacturing to other countries. In addition, it was highlighted that the new calculation would make it impossible for companies to estimate the benefit relying on both R&D and total company expenditure, which is not known until the end of financial year.
7. Collaboration premium
Proposed in Recommendation 2 of the 2015 Review of the RDTI was the introduction of a collaboration premium of up to 20% for the non-refundable tax offset to provide additional support for the collaboration with publicly funded research organisations.
This was not included in the changes proposed in this bill and submitters suggested its inclusion and that adjusting the programme to encourage collaborative R&D could increase the programme’s effectiveness.
At this stage, it seems unlikely the bill will be passed in its current stage with the election looming. If the government accepts the senate recommendations, large scale re-write of the bill will be required.