Proposed changes to R&D tax incentives (RDTIs) could reduce future R&D expenditure, undermining innovation and the development of new industries in the long-term. In 2017, Australia’s R&D expenditure sat at 1.787 per cent of GDP, far below the then OECD average of 2.342 per cent of GDP. Changes in RDTIs will potentially drive this rate even lower.
What are the proposed changes?
The Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 (the Bill) could see $1.8 billion retrospectively cut from the 2019-20 budget.
In 2016, the Review of the R&D Tax Incentive (the Review) found that Australia needed to do more to bolster research. The Review made recommendations such as hiring PhD graduates, collaborating with Australian research institutions and reducing companies’ compliance costs. In response, the Turnbull Government announced in 2018 that they would reform the RDTI to assist larger companies with R&D spending. However in 2019 the Morrison Government reintroduced the Bill, departing from the Review’s recommendations.
- Large companies
Large companies with an annual turnover above $20 million will see their tax offset changed from 38.5 per cent to the entity’s corporate tax rate plus a premium determined by the intensity of their R&D expenditure. In the Bill’s second reading speech, Treasurer Josh Frydenberg stated that this would provide an ‘incentive for companies to increase their R&D expenditure’ and simplifies the ‘previous four-tier system’.
- Small companies
However for small companies with an annual turnover below $20 million, the tax offset will be reduced from 43.5 per cent to 41 per cent and will be capped at $4 million per annum (excluding R&D on clinical trials). There is currently no cap for companies with a turnover below $20 million. The introduction of a cap could therefore have far-reaching impacts on Australia’s economy and start-up landscape.
Impact on Australian innovation
Australia’s economy has traditionally been propped up by mining, banking and services, neglecting tech and science which are key to innovation. To foster an innovative business ecosystem, the government must play an active role in incentivising R&D. Thus decreasing RDTIs further slows Australian innovation and risks long-term economic damage.
Daniel Petre AO, founder and partner at AirTree Ventures, laments the economic impact of job losses if RDTIs are weakened in Australia. ‘The future of our society will be a function of the future economy. The future economy will be a function of us creating lots more high paid jobs and the proxy for that is R&D expenditure.’
He explains that these future jobs will largely be lost in the start-up industry. ‘[These changes] will retard start-ups … They’ll get through it and recalibrate, but the government will have retarded one of the largest opportunities for job creation that exists.’
The RDTI changes would also mean companies who file RDTI claims between the 2019-20 financial year and the passing of the Bill may have to amend their tax return. This also forces small companies to redesign R&D budgets as they receive smaller rebates than anticipated.
‘They should say that this legislation will apply to the next tax year,’ Daniel argues. ‘They’re pulling $1.8 billion out of R&D at a time when we need it more and when subsidising companies is useful, and they’re going the other way. They’re attacking the biggest innovators … which is ludicrous.’
These changes also exacerbate uncertainty, which can stifle investment in Australian industries. David Kenney, a partner in Hall Chadwick, indicated that Australia’s future business landscape looks uncertain.
‘Businesses need certainty. They need less complexity and they need to understand that R&D is not a year by year proposition … Every time there is a cut, people start to say, ‘what else will change?’.’
David also noted the impact of the Government’s Jobkeeper payment on R&D. ‘If companies are already on Jobkeeper, that cannot be counted to the money they’re spending on R&D. So if you get $1500 a fortnight for one employee doing R&D, that doesn’t get treated as incurred by you.’
Although changes to RDTIs may benefit large companies, smaller companies and start-ups could be facing a local business landscape that is inhospitable to innovation.
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