What does the future hold for the R&D tax incentive?


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The Government has released the findings of the R&D Tax Incentive Review, and is encouraging submissions until 28 October 2016.

The purpose of the review is 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 review, undertaken by Bill Ferris (chair of Innovation Australia), Dr Alan Finkel (Chief Scientist) and John Fraser (secretary to the Treasurer), makes a number of core recommendations.

These include:

  • Recommendation 1: 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.
  • Recommendation 2. Introduce a collaboration premium of up to 20 percent 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.
  • Recommendation 3. Introduce a cap in the order of $2 million 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.
  • Recommendation 4. Introduce an intensity threshold in the order of 1 to 2 percent 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.
  • Recommendation 5. If an R&D intensity threshold is introduced, increase the expenditure threshold to $200 million so that large R&D-intensive companies retain an incentive to increase R&D in Australia.
  • Recommendation 6. That the Government investigate options for improving the administration of the R&D Tax Incentive (eg. adopting a single application process; developing a single programme 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 Minister for Industry, Innovation and Science, Greg Hunt, says innovation is crucial for both established and new businesses.

“It’s not just about tech startups or IT; it’s also about established businesses doing things better to be more productive and stay competitive,” he says.

“The review includes recommendations to improve the effectiveness and integrity of the programme, including encouraging additional R&D expenditure and improving business-research collaboration.”

The Business Council of Australia has welcomed the release of the review.

“Changes to the structure of the R&D tax incentive must be carefully considered as they would have a powerful impact on businesses in Australia, both small and large,” says Business Council chief executive Jennifer Westacott.

Meanwhile Australian Industry Group released a statement saying if implemented, the changes would have both costs and benefits for innovation active businesses.

"While these ideas show potential, if implemented they would be further major changes to a scheme that has been transformed, reformed or cut nearly every year for the past decade,” says Australian Industry Group chief executive Innes Willox.

“The incentive needs greater stability if it is to deliver sustained higher investment in innovation. Change should not be made lightly.”

Willox added: "The Government is to be praised for releasing the report and allowing further time for input from business and researchers prior to taking any decisions.”

The Government says it is inviting submissions until 28 October 2016, which will be accompanied by industry and state-based roundtables across the country, followed by further discussions in November and December. The Government’s final response is expected before the end of March 2017.

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