R&D tax incentive "crackdown" could harm innovation
While the 2018 federal Budget was generally welcomed by representatives of Australia’s technology industry, planned reforms to the government’s R&D tax incentive scheme have been less warmly received.
The Australian Information Industry Association (AIIA) has expressed concern that changes to the scheme could act to discourage local investment, and risk Australia falling behind in its global competitiveness.
The AIIA noted that businesses with a turnover of under $20 million will now only be able to claim a 13.5% benefit, which compares to a previous allowance of up to 16.5% for the start-up cohort.
Businesses with a turnover of over $20 million will also be largely worse off, with most companies expected to have their benefit cut by 53% to just 4%, the lowest in Australia’s 33-year history of having an R&D tax incentive scheme and the lowest globally.
This rate will be the incentive offered for companies spending between 0% and 2% of their revenues on R&D. Higher rates will be offered for companies spending a larger portion of their revenue on R&D — a measure known as R&D intensity — capping out at 12.5 percentage points for a higher than 10% intensity.
Meanwhile, the maximum value of R&D expenditure which is eligible for a tax offset has been increased from $100 million to $150 million.
But the presence of a cap puts a ceiling on the scale of major R&D investment programs, giving large companies a reduced incentive to develop new technology, the AIIA said.
“Australia is in the midst of an R&D recession with a $2.2 billion decline in investment, according to the latest data,” AIIA CEO Rob Fitzpatrick said.
“While some elements of the 3F review now being implemented are better than those considered earlier, the rhetoric focuses on ‘crackdown’ rather than expansion and growth. Australia’s global competitiveness is reliant on a buoyant R&D mindset.”
The AIIA is urging the government to increase the pool of funds available for the incentive scheme, remove the $150 million cap for large companies and offer incentives to make initial investments in R&D more attractive, such as with a policy to award a flat 8.5% rate for first-time investors in R&D regardless of intensity.
Meanwhile, StartupAUS has expressed concerns that the government’s planned crackdown on abuses of the R&D incentive scheme could reduce the rate of successful claims by start-ups unless further clarity was provided regarding eligibility criteria for the scheme.
“We’ve been saying for a while that this program has a narrow focus on research, to the exclusion of development. That makes it hard for start-ups — particularly in the software space — to be 100% sure about what they’re allowed to claim,” StartupAUS CEO Alex McCauley said.
“A crackdown therefore leaves them particularly vulnerable, even in circumstances where they’re legitimate companies trying to do the right thing. The stakes are really high here for start-ups and founders who often rely on this scheme for the survival of their business in its early stages.”
Tax and advisory company Grant Thornton likewise noted that new regulations such as R&D integrity tests and other compliance and administration requirements are likely to punish every participant in the program to catch just a few abuses of the system.
“The federal government is genuinely seeking to crack down on companies seeking to take advantage of R&D incentives, but in doing so it may be taking a blunt instrument to innovation and sector growth,” Grant Thornton National Specialist Tax Partner Sukvinder Heyer said.
“More stick without more carrot may discourage investment expansion in some key industries which are already facing an uphill battle in highly competitive global markets.
“Australian entities in robotics, biotech, fintech, life sciences and manufacturing are already challenged in comparison with their global peers and hitting them with more red tape — albeit well meaning — will only tie them down when we need them to fly.”
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