Federal Budget 2019 – little mention of innovation and R&D

05 April 2019

In the wake of the release of the Federal Government’s 2019-20 Budget, there has been much discussion of the winners and losers, with little mention of innovation and R&D. Examination of the Budget Papers show that a significant contributor to the projected surplus is a decline in the projected support for Australian business innovation. The controversial proposed changes to the R&D Tax Incentive announced in last year’s budget were put on hold in February 2019. These were estimated to reduce the cost of the program by $2.4B over four years. In the absence of these changes, as well as no new measures being announced in this year’s budget, it would be expected the Government would have estimated a significant increase in the cost of the program. In contrast, what was revealed in the Budget Papers was a significant decline, by $1.35B, in the projected increase in the cost of the program compared to last year’s budget projections.

R&D - 2018-19 Budget Projections ($m)
2018-19 2019-20 2020-21 2021-22 TOTAL
2,373 2,466 2,566 2,689 10,094
R&D - 2019-20 Budget Projections ($m)
2018-19 2019-20 2020-21 2021-22 TOTAL
1,967 2,237 2,249 2,292 8,745
Change in projections from 2018-19 Budget to 2019-20 Budget ($m)
2018-19 2019-20 2020-21 2021-22 TOTAL
-406 -229 -317 -397 -1,349

The Government’s stated rationale in the Budget report was that this $1.35 billion reduction is reflective of a “one-off adjustment recognising lower than estimated claims for prior years … both for the numbers and size of claims”. Given the impact of the aborted/deferred 2018 budget changes, this statement is difficult to reconcile, unless the extent of the so called cost blow out was overestimated. Moreover, it is indicative that the reduction in claimants and the size of their claims is in no small part due to the crackdown on claims by the ATO and AusIndustry during the past 12-18 months. Whilst the legislated definition of R&D has not changed since the introduction of the legislation in 2011, both administrative agencies have been issuing confusing guidance, some of which appears to have little basis in the legislation, associated explanatory memorandum, and case law. This guidance has been used as a basis for narrowing the scope on what activities or expenditure qualify as eligible R&D under the program. The narrowed interpretation is also used in binding findings about company’s activities followed up with requests for companies to revise their tax assessments, notwithstanding that there are avenues of review by AusIndustry that have not been exhausted.

Common themes encountered in the new guidance, as well as findings, include the views that “business as usual” activities or expenditure are not eligible, which has no basis in the legislation. R&D activities may well be “business as usual” for a startup or any entity that seeks to create new or improved products. Other common misrepresentations include “that a process of discovery during which existing tools and technology are used” will not qualify as eligible R&D. The notion of eligible R&D being required to apply new tools and processes contradicts the underlying ‘principles of science’ which usually requires experiments to be conducted using a defined approach in order to validate the accuracy of the outcomes. For example, innovative solution development in software often requires the use of existing tools and technology just like a biotechnology company must use specific product development tools and clinical trial protocols. Furthermore, the Frascati Manual, referred to in recent guidance material from AusIndustry, acknowledges that ”new applications of existing scientific knowledge or new uses of available techniques or technologies” help define the creation of new knowledge.

BDO’s view remains that the program is governed ultimately by its legislation, therefore companies that were eligible in prior years have not ‘lost’ their eligibility going forward.

Unfortunately, the current environment is not dissimilar to that seen for a time under the previous R&D Tax Concession program, where the Industry Research and Development (IR&D) Board became more aggressive in its position on eligibility until several AAT and Federal Court decisions confirmed the primacy of the legislation in assessing the eligibility of activities.

The paucity of comparable case law precedent under the present R&D Tax Incentive program enables the administering agencies to use their own guidelines as a basis for interpreting activity eligibility, introducing uncertainty into the program. Inevitably, many businesses have been discouraged from claiming and are seeking to move their R&D activity to other more favourable jurisdictions (where tax concessions may be greater or where additional incentive measures exist). This is a concerning trend to those who recognise that, as supported by OECD research, incentivising business R&D leads to significantly enhanced prospects for future economic prosperity.

For the full Federal Budget analysis, please visit our Federal Budget 2019-20 page.