BDO concerned with Government’s changes to R&D Tax: “little thinking has been done”

09 June 2019

BDO Australia has expressed concern that the Government has not listened to industry feedback or findings from the Senate Inquiry report from earlier this year and has sought to re-introduce its proposed changes to the R&D tax incentive.

BDO R&D Tax Partner, Nicola Purser said: “The senate inquiry into the proposed changes, not only highlighted how flawed the measures were, but demonstrated that they were based on treasury “hunches” and that no economic modelling had been undertaken. 

“In particular we’re disappointed that the Government has sought to re-introduce its unnecessarily complex intensity threshold for companies with over $20m turnover, despite the senate inquiry recommending that the measure be re-thought.

“It seems that very little thinking has been done.”

“In an environment where the Government has publicly recognised that Australia’s business spend on R&D is falling, it seems ludicrous that it would seek to implement measures to dis-incentivise companies to undertake R&D in Australia vis a vis other jurisdictions. Even more disappointing is that by having an effective date on 1 July 2019, the Government is once again looking to retrospectively introduce changes to the R&D tax incentive, such that activity that companies have already undertaken or are committed to undertaking will attract a lesser incentive than those companies will have budgeted, or attracted investment, for.

“The vast majority of Australian companies that produce goods, whether that be from manufacturing, agriculture or mining will be even worse off under the proposed measures, than under those that were parked earlier this year. The Senate committee that evaluated the prior iteration of the intensity measures and noted - this intensity measure may have unintended consequences for larger R&D entities undertaking eligible R&D activities. In particular, the committee notes the possibility that businesses that manufacture in Australia may be disadvantaged compared with businesses that manufacture overseas. Further, the committee notes that the proposed intensity measure may also disadvantage those R&D entities that require large capital investment and operate on small margins. The committee considers that as currently drafted, the proposed intensity measures has possible unintended consequences that may disadvantage a range of Australian R&D entities.”

“It’s astounding that following the Senate committee’s conclusions, the intensity measure (albeit slightly modified) remains a key piece of the proposed changes to the R&D Tax Incentive.

“According to the Government, ‘Around 1,030 (65 per cent) of companies claiming the non-refundable R&D tax offset currently have intensities of 4 per cent or lower, giving these firms access to the lowest (4.5%) R&D Premium. The remaining non-refundable offset recipients (approximately 550) have intensities greater than 4 per cent’. 

“With the complexity of the administration of the system, in particular the joint administration by AusIndustry and the ATO, the base 4.5% benefit, applicable to 65% of claimants accessing the non-refundable offset, is of marginal benefit. 

“It can only be assumed that the measures will dis-incentivise Australia’s miners, manufacturers, and agribusinesses from accessing the program and therefore are not targeted at increasing R&D but are being introduced purely as a cost saving measure.

“The other measures proposed by the bill are as per that introduced last year:

  • For companies under $20m turnover, fixing the refundable offset rate to 13.5% above the corporate tax rate.  Based on the current tax rate for companies under $20m, this will reduce the refundable offset from 43.5% to 41%. A fairly significant reduction from 45% as originally introduced in 2012.
  • Capping the refundability of the offset at $4m with an exemption to the cap for expenditure on clinical trials.  Whilst BDO is largely ambivalent to this measure, we have concerns that it again disrupts the industry agnostic nature of the program and rewards activity that, whilst admirable, provides little economic return to Australia with majority of any value created owned offshore.
  • Increasing the R&D expenditure threshold from $100m to $150m
  • Convoluted provisions for clawback adjustments for feedstock outputs, government recoupments and balancing adjustments
  • Amendments to the administration of the program including AusIndustry interpretative guidance on footing with tax office rulings, and publication of companies R&D spend.

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