Should there be changes to the R&D Tax Incentive?

By Shoaib Naveed | Consultant – R&D Services

Innovation & Science Australia (ISA) says yes. Its recent report, ‘Australia 2030: Prosperity through innovation – A plan for Australia to thrive in the global innovation race’ released this year, highlights several recommendations to the Federal Government on how to improve Australia’s ranking when it comes to global innovation and industry. As part of its report, the ISA panel amended some of the changes proposed in the Federal Government’s Review of the Research & Development Tax Incentive, which took place in 2016.

Where does Australia rank globally for innovation?

The Global Innovation Index ranks Australia 23rd out of 127 nations for research performance. However, when it comes to Australia’s innovation efficiency and how we utilise our research to generate business investment, Australia is disappointingly ranked at 76th. According to ISA’s Chairman, Bill Ferris, “At [a] time when Australia needs to accelerate its innovation performance, we are falling behind our global peers, particularly in student performance in science and mathematics, and in business investment, in research and development. This is more than a canary chirp in our economic mineshaft: it is a clarion call for national action.”

What are the ISA panel’s recommendations for the R&D Tax Incentive?

In the report, the ISA panel put forward 30 recommendations to improve and strengthen Australia’s innovation performance. Among these, there are five key policy recommendations for the R&D Tax Incentive program:

1: Rewarding national priorities

The ISA panel recommends that the Federal Government needs to refocus its financial support for businesses from indirect measures, such as R&D tax incentives, to more direct measures, such as grants, in areas of competitive strength, strategic benefits and national priorities. In particular, the ISA panel recommends developing new guidance, case studies and public rulings to further strengthen the R&D Tax Incentive. Additionally, the ISA panel recommends increasing the funding for the Export Market Development Grant program, along with more trade missions and promotions, that will ultimately benefit small and medium-sized enterprises.

2: Capping R&D tax offsets

The ISA report suggests that the refundable offset cap of $2 million, proposed in the original 2016 Review of the R&D Tax Incentive, should be increased to $4 million per year and that a lifetime refund cap of $40 million per company should be introduced. This will incentivise companies, to increase their R&D expenditure within Australia, whilst taking full advantage of the increase in the refundable offset cap. However, it’s important to note that the lifetime refund cap of $40 million could potentially have an impact on certain research sectors, mainly startup medical companies. When undertaking research, there’s the potential for high costs and losses, with a number of research projects never coming to fruition. This could be financially limiting for companies that incur a significant amount of expenditure through undertaking numerous research projects annually. Additionally, it should be noted that the refund cap change does not apply to companies that have a turnover of over $20 million, as they already are applicable for a non-refundable tax offset.

3: Intensity thresholds for large companies

The ISA report proposes to introduce a change in how the ‘intensity threshold’ applies to companies applying for the R&D Tax Incentive. This change would incentivise companies (especially large companies) to conduct more R&D activities within Australia. The ISA proposes setting a trigger level of one percent of a company’s total annual expenditure when claiming the R&D Tax Offset as opposed to the original expenditure threshold that had to be met.
Figure 1: Example illustrating the original recommendation from the 2016 Review of the R&D Tax Incentive.
Figure 2: Example illustrating the proposed recommendation by the ISA panel.
As illustrated, with the proposed change, a company can claim all R&D expenditure once the trigger has been met.

4: Collaboration premiums

The Australian Government has been seeking to foster greater collaboration between higher education sector (PhD students) and companies conducting R&D. At present, Australia has low rates of industry-research collaboration compared to international standards. As such, the ISA panel supports the original recommendations that were presented in the 2016 Review of the R&D Tax Incentive to introduce a collaboration premium of up to 20 percent for large companies that collaborate with research sectors, including universities, for the benefit of innovation and industry. Additionally, businesses that employ PhD students are eligible to take advantage of the collaboration premium.

5: Shift in the R&D Tax Incentive administration process

The number of companies undertaking R&D activities is increasing annually, with a record 13,567 companies claiming in 2015-16. Subsequently, the administrative burden on the governing bodies administering the R&D Tax Incentive, is also increasing. Currently, there are two governing bodies, the AusIndustry and the Australian Tax Office, that oversee the R&D Tax Incentive. AusIndustry, a division of the Department of Industry, Innovation and Science, administers the technical aspects of the R&D Tax Incentive, and assesses whether an R&D Project being undertaken by an R&D entity is eligible. The Australian Tax Office administers the financial aspects of the R&D Tax Incentive, and assesses whether the expenditure claimed by a particular R&D entity, falls within the tax legislation. The ISA panel strongly propose that the administration process,s should be streamlined to improve application efficiency and effectiveness.

Do you agree with the recommended changes?

At CharterNet, we welcome the news and agree that Australia needs to improve innovation in order to strengthen and grow our economy. It’s now in the hands of the government to consider these recommendations along with the original 2016 Review of the R&D Tax Incentive. What are your thoughts on the proposed changes? Do you agree with them? Let us know by emailing Alternatively, if you need some assistance in lodging your FY17 R&D registrations or want some clarification around the proposed changes, contact us here.