Disaster averted for R&D support…for now

15 February 2019

Dave Smith, Associate Director, Tax, Research & Development |

The outcome of the recent Senate Inquiry into the proposed changes to the R&D Tax Incentive highlighted that changes to the program will have a significant impact on Australia’s innovation community and careful consideration is needed regarding the future approach.

It became clearly evident from the Senate hearing that the government departments that developed the package of reforms within the Bill, 'Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures', had formulated the reforms to the R&D Tax Incentive program purely on the basis of reducing the program’s costs. The lack of understanding of the potential impact of the changes by those departments was highlighted by the response of the Department of Industry, Innovation and Science to Senator Hume’s questions about the retrospective start date of the proposed legislation. In the Department’s response it stated “I note that the companies still have 10 months after the financial year to register activities, so they've still got some time to look at their plans and what they're undertaking”. Investment decisions by industry participants in the program are not typically made retrospectively, instead they are made prospectively and based upon forecasts of future markets and market environments. Thankfully, the Senate Committee acknowledged concerns voiced during the inquiry that introducing the legislation retrospectively, and in particular a refund cap, will have disastrous consequences for those companies that have already made their investment decisions into future R&D.

It also became evident that the intensity premium measure had been poorly formulated and was based upon some modelling and ‘judgement calls’. This was highlighted when Senator Ketter asked Treasury to provide details of the modelling and encourage any company that would be better off under the intensity measure to approach the Committee. Treasury responded to state it was unable to provide details of the modelling because “it's a set of judgements that we formed based on the available information and data”, and they had not thought to approach any of the 180 companies they identified would be better off under the intensity measure. They had also failed to consider which businesses would be disadvantaged by the measure and the potential impact of a R&D Tax Credit being introduced in New Zealand. In its final report, the Committee shared participants' concerns that this intensity measure may have unintended consequences for larger R&D entities undertaking eligible R&D activities, and disadvantage Australian businesses compared with businesses that manufacture overseas.

Whilst most of the innovation community accept that changes to the program are necessary, let’s hope that the key learning from the Senate Inquiry is the need for decision makers to involve industry in its decision making process. It is important that any changes to the program maintain public confidence in the integrity and financial sustainability of the R&D Tax Incentive. Any changes must continue to provide an incentive for companies to remain in Australia and to invest their resources in research and development. This will ensure business innovation across the economy is promoted and allows the programs objectives of additionality and spillovers to be achieved.

If you have any questions about how you can make the most of the R&D Tax Incentive now, do not hesitate to contact me directly.