David Gelb, Partner comments on the R&D Tax Incentive Bill
Australian businesses carrying out R&D activity will be disadvantaged by the proposed legislation which is largely a re-introduction of changes rejected earlier this year by the Senate Economics Legislation Committee. If enacted as drafted, the changes will take effect for income years commencing on or after 1 July 2019.
Large companies will see the R&D Tax Incentive (R&DTI) net benefit drop from the current 8.5 percent to a scaled R&D premium – where most will only receive a net benefit of 4.5 percent or slightly more.
The use of an R&D premium based on the ‘intensity’ scale raises significant concerns, as companies will not be able to forecast their R&D benefit until after the end of the income year. This negates the objective of the program, which is to create additional R&D activity in Australia and incentivise future larger R&D budgets.
It also means that companies that invest in carefully documenting their R&D activities may find the end benefit significantly eroded by the cost of compliance. They will also be affected by a negative impact through their supply chains.
Smaller businesses, with an aggregated turnover below $20M, will see a more modest reduction from 16 percent to 13.5 percent, with a cap on the cash refund of $4M (excepting clinical trials). However the danger remains that given companies typically factor in the R&D Incentive into their hiring and investment decisions, R&D projects will be curtailed or off-shored.
Companies likely to be most impacted include manufacturing, engineering and agricultural businesses, which are in general facing challenges from a drop in productivity. Some in regional areas are also impacted by drought.
Feedback from companies is that the R&DTI is a material consideration when planning their future R&D activities and that the current instability in Australia’s R&DTI program is impacting medium and longer term decisions around where to locate their R&D.
As a result, many of those companies may look to relocate their R&D to other jurisdictions which offer more generous benefits, such as China, Singapore, the UK and New Zealand. The latter has just introduced a 15 percent R&D credit.
Most mainstream global R&D Incentive regimes continue to recognise the pivotal role that large companies play in the R&D ecosystem. Given the downward trajectory in Australia’s recent R&D performance, this measure is likely to accelerate that trend.
On a global scale, Australia’s attractiveness as an R&D destination will be further eroded.
Tags R&D Tax