The Government released the R&D Tax Incentive Review report for public consultation last week and called for business, industry and the research community to have their say.
The review, authored by Innovation Australia chair Bill Ferris, Chief Scientist Alan Finkel and Secretary to The Treasury John Fraser, was undertaken with a brief to ‘Identify opportunities to improve the effectiveness and integrity of the R&D Tax Incentive, including by sharpening its focus on encouraging additional R&D spending’.
The group was tasked with ‘ensuring the sustainability’ of the incentive program which costs the government around $3B per year.
Six recommendations were released:
- 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.
- 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 STEM PhD or equivalent graduates in their first three years of employment. If an R&D intensity threshold is introduced (see recommendation 4), companies falling below the threshold should still be able to access both elements of the collaboration premium.
- Introduce a cap in the order of $2m 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.
- Introduce an intensity threshold in the order of 1-to-2% 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.
- If an R&D intensity threshold is introduced, increase the expenditure threshold to $200m so that large R&D-intensive companies retain an incentive to increase R&D in Australia.
- That the government investigate options for improving the administration of the R&D Tax Incentive (e.g. adopting a single application process; developing a single program 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 Incentive and the amounts of R&D expenditure claimed.
The recommendation garnering the most comment is in relation to the $2m cap on the cash refund payable with many companies, particularly in the biotechnology sector, voicing their alarm at this restriction.
The recommendation to improve the administration of the program and reduce some of the complexity of the program is welcomed and will hopefully bring with it some efficiencies.
The R&D Tax Incentive program, which replaced the previous R&D Tax Concession program from 1 July 2011, has experienced a great deal of change since the legislation was first released.
Our clients talk of the ‘shifting goal posts’ each year, becoming more complex and creating different interpretations of the program.
The rate has recently been reduced by 1.5 percentage points and this report suggests further changes may be imminent.
Frequent change in this tax policy, such as changes to the thresholds and rates, affects investor confidence, both within Australia and globally. This uncertainty and constant change undermines business confidence in the stability of the program and creates unnecessary complexity in the administration and compliance aspects of the program.
We hope the recommendation for simpler administration and the need for test cases to establish parameters is recognised and implemented.
A copy of the full report is available here.
Interested parties can submit a response to the Review by October 28.