Businesses have been plunged into further uncertainty as the Senate inquiry into R&D tax incentive (‘RDTI’) reforms is delayed a third time this year.
What do we know so far?
The Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 (‘the Bill’) was introduced on the 5 December 2019 to reform RDTIs. Treasurer Josh Frydenberg described these reforms as “targeting and improving the integrity and sustainability of the research and development tax incentive”.
The Bill’s proposed changes included a $4 million cash refund cap for small companies with an annual turnover less than $20 million. Larger companies with an annual turnover more than $20 million would have their tax offset measured by the company’s “R&D intensity”.
The Bill was then referred to the Senate Economics Legislation Committee, which was initially due to submit a report on the 30 April 2020. The reporting deadline was then delayed to 7 August 2020 and the presentation of the report of the inquiry was extended to 24 August 2020.
However on 21 August 2020, the Economics Legislation Committee delayed the reporting of the inquiry yet again to 12 October 2020, a week after the Government’s delivery of the 2020-21 Budget on the 6 October 2020.
The Bill is currently in progress in the Senate, awaiting the Economics Legislation Committee’s report before a decision is made to enact the Bill.
How do these delays affect businesses?
The major impact of these delays is uncertainty.
“[Businesses are] lodging a tax return without knowing if the legislation will be enacted,” explained Nicola Purser, a Partner leading the R&D team at BDO.
This puts businesses in a vulnerable position where budget forecasts and investment decisions are also being delayed, forcing businesses to grapple with further uncertainty.
There is also a possibility that delays, and the timing of the new reporting deadline, signal further amendments to the proposed changes.
The Economics Legislation Committee’s report is due after the delivery of the Federal Budget. Ms Purser thus posits that the government may be looking to other measures to stimulate R&D.
“Everything’s back on the table.
“We’re looking for the Government to say that the measures won’t apply to the 2019-20 financial year. They need to make sure these [reforms] don’t apply retrospectively.”
How have businesses responded to the reforms?
Submissions to the Senate inquiry and representatives at a public hearing also reveal a resounding resistance to the reforms.
The Economics Legislation Committee held one public hearing on the 29 June 2020. Most representatives at the public hearing opposed the reforms.
A representative from ResMed, a manufacturer of medical devices and cloud based software treating respiratory disorders, explained at the hearing that RDTIs were “essential to ResMed’s success and continual investment in Australia”.
“The proposed R&D law will create a disincentive for a company like ResMed to create an ecosystem of investment, commercialisation and manufacturing in Australia. It is our recommendation that the proposed amendments are abandoned or, at the very least, amended so that cost of goods sold for Australian manufacturing is not taken into consideration in calculating the intensity premium”.
These reforms also appear to hit engineers and scientists in manufacturing the hardest.
Ms Purser noted that “industries with high costs and low margins, such as agriculture and mining” would be particularly affected as these industries shoulder higher production costs.
What should businesses do now?
Whilst businesses await confirmation on the RDTI reforms, Ms Purser recommends two approaches.
“They should be making claims under current legislation but keeping in mind that there may be a claw back due to a reduction in rates.
“For larger businesses it [may be] sensible to wait and not lodge R&D claims until they receive more certainty.”
Investment decisions will also be different for each company.
“If they do have options about where they can do R&D, they may want to consider other jurisdictions.”