R&D tax incentives: policy uncertainty is driving companies to innovate overseas

David Gelb, Partner, R&D Tax Incentives
David Gelb, Partner, R&D Tax Incentives

This week marks the one year anniversary since the review of the R&D Tax Incentive by Mr Bill Ferris, Dr Alan Finkel and Mr John Fraser was handed to the government.

Industry are hungry for news on the R&D Tax Incentive. Here’s hoping the Federal Treasurer’s upcoming Budget will have the answers industry is looking for because Australia needs to invest in its future now more than ever; that future rests with strong support for innovation. We hope that Government continues the dialogue with business in the development of their response to the review, as the review currently has recommendations which, if implemented, could impact the desire of Australian companies to invest and commercialise their innovations onshore.

Of the six recommendations, two could see companies consider taking their R&D offshore. Of greatest concern is the proposal to introduce a 1-2 percent intensity threshold (Recommendation 4) for those claiming the non-refundable R&D tax offset.

An intensity threshold would greatly reduce or in most cases eliminate the R&D benefit for companies accessing the non-refundable R&D tax offset (i.e. those with an aggregated turnover of $20M or more). For those retaining a small R&D benefit, the cost of compliance would stay the same (or possibly go up) while the benefit would drop significantly, reducing the cost/benefit of the program (for companies and government alike

A $2M cap on the cash refund for those accessing the refundable R&D tax offset (i.e. aggregated turnover <$20M) would cap the cash refund at $2M in a given year. While this would impact far fewer companies (<150), most of those are undertaking medical research. Many have relocated part or all of their R&D to Australia because of the R&D Tax Incentive.

For example, a company that has $30M in expenditure and spends $1M on R&D would currently receive an 85k net R&D benefit. Under the proposed intensity threshold, this would be reduced by 30% to 59.5k (under a 1% intensity threshold) or even 60% or 34k (under a 2% intensity threshold). This is after the net R&D benefit was reduced by 15% only a year ago.

In essence, the intensity threshold penalises strong all round R&D performers. For some it has the potential to wipe out their entire R&D tax benefit. It’s not hard to see that many companies may reconsider claiming R&D in Australia and start to look elsewhere.

The reform and modernisation of our traditional industries (e.g. car industry, mining manufacturing, etc.) has brought widespread economic change. The change to these industries has released the significant technology underpinning them to wider development and commercialisation into new opportunities for advanced manufacturing. This development is underpinned by R&D with new opportunities to replace traditional industries and jobs.

Through its support of innovation, Australia can demonstrate it is indeed a clever country with the potential to open up new employment opportunities. However a failure to support and promote innovation will equally demonstrate the opposite is true.

Without a strong and stable R&D incentive, home grown innovations and entrepreneurs will look to outsource innovation overseas, resulting in no return on investment to Australia.

As the publicly available submissions in response to the report show, many companies are now reconsidering their long term investment in R&D in Australia.

Australian business need long term certainty in the R&D tax Incentive. As Australian business recognises a strong innovative investment culture will support strong economic growth which will secure Australia’s future prosperity.

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