KPMG responds to #Budget2016 R&D and economic implications

On innovation, Paul Van Bergen, KPMG R&D Incentives Tax Partner said:

The Budget contained some welcome news for innovative Australian companies.

  • Companies with under $10 million turnover will still attract 45 percent R&D tax offset and will have an effective tax saving of 17.5 percent, given lower company tax rate of 27.5 percent. Earlier proposals to drop the R&D tax offset rate have finally lapsed.
  • The R&D tax incentive has not changed. This provides stability. As part of the National Innovation and Science Agenda (NISA) the chairman of Innovation Australia Board carried out a review of the R&D tax incentive.  Feedback from many Australian companies, professional bodies and advisers may have been helpful in maintaining the status quo.
  • The government is proceeding with all of the initiatives announced in December 2015 under NISA.
  • New rules for investment holding companies will make Australia more attractive for investment from overseas.
  • Internships to provide facilitated work experience for 100,000 youth may provide skilled workers for the ‘new economy.

On the economic outlook, KPMG Chief Economist Brendan Rynne said:

“Tonight’s budget has seen a clear intent to reinvigorate investment by the business sector by phasing in a cut in corporate tax rates.  This change to the corporate tax rate will stimulate investment, most likely foreign investment, lifting productivity and real wages, and reducing unemployment as flow-on consequences.

This is much-needed – in the absence of stimulus like this, we expect Australia’s economy only to achieve only sanguine growth over the next few years, predominately as a consequence of declining net investment activity following the boom years of the commodity super cycle.  Non-mining investment has not picked up, which has meant the declining mining investment has been in fact been a drag on economic growth. These concerns are obviously also worrying the Reserve Bank of Australia, who only today has cut the official cash rate down to 1.75 percent – the lowest on record.

Domestically, Treasury is now forecasting the Australian economy will grow by 2.5% in real terms in each of 2015/16 and 2016/17, increasing marginally to around 3.0% for the remainder of the forward estimates period. Since MYEFO, Treasury now see:

  • Inflation pressures being softer, down to around 1.25% for this financial year, increasing to the bottom of the RBA target band of 2.0% for FY17;
  • Unemployment falling to 5.5% by the end of FY17 and remaining there for the next 12 months; and
  • A further softening in wages growth, suggesting even though the unemployment rate is declining, the labour market isn’t feeling enough pressure to materially raise wages.

Tonight’s Budget also reveals that the Commonwealth Treasury is less optimistic about global economic conditions than they were six-months ago, which is consistent with the IMF and World Bank, who have also recently downgraded their expectations of world growth. Concerns about the state of the Chinese economy, particularly debt bubble worries, European instability driven in part by the possible exit of the EU by Britain, and a softening in the US economy, have all collectively added to the uncertainty as to the short to medium term outlook for the world economy.

Folllow us on @kpmgaustralia for more updates.

Media enquiries: Ian Welch 0400 818891

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