More change for the R&D tax incentive – but is it for the better?

Analysis by Peter Roberts

Australia has since the 1980s had tax concessions and incentives designed to encourage long-term business R&D that creates future economic benefits for individual companies, and the nation.

But the latest changes to what is now a tax offset against eligible R&D continue the endless changes to the basic structure of the scheme, further reduces the value of the benefit, creates new unintended consequences, and piles confusion on confusion.

This comes as Fairfax reports yet more cuts to government R&D expenditure – government spending is just half a per cent of GDP – lower than 40 years ago.

Fairfax says: “Australia’s overall spend on R&D (recently) fell to 1.88 per cent of GDP – well behind the OECD average of 2.36 per cent.

“Business investment in R&D is now also at its lowest level in two decades as a share of GDP.”

What a disgrace.

But back to business R&D tax law. In a recent paper Brisbane R&D tax advisers Swanson Reed said it all: “In a globally competitive market, Australia must retain an attractive, stable and broad-based R&D Tax Incentive to encourage large companies to conduct and maintain their R&D activities within Australia.”

The offset replaced a straight tax concession in 2011, yet it has undergone constant change.

The federal government’s latest Treasury Laws Amendment 2018 bill was only revealed on June 29 this year, yet it is meant to apply from the very next day, July 1, 2018. Trouble is, it still has not passed the Senate and may never do.

How can companies even begin to plan for this year not knowing the final form of an unpassed law?

At its most basic the legislation is another in a series of laws that cut the value of the offset. The ‘refundable’ offset that applies to small companies fell from 45 cents in the dollar to 43.5 cents in 2016, then down to 41 cents under the 2018 proposal. It will continue to fall in line with the company tax rate.

So called non refundable offsets have similarly fallen in value.

This year’s changes propose to raise the cap a company may receive as an offset from $100 million to $150 million, which on the surface looks to be a good thing.

But big spenders are likely to be spending more than $100 million, so they can just claim $150 million. The incentive is meant to induce new research, but this may not.

The proposal is also to introduce a variable rate based on R&D intensity – the proportion of a company’s turnover devoted to R&D.

The problem with R&D intensity is that manufacturers, for example, tend to spend a lower proportion of turnover on R&D than, say, new drug developers and so will receive less of a benefit. Why?

Not only that but big companies can split their operations up into a number of ‘eligible entities’ that each could be made to appear to have a high R&D intensity.

The possibilities of playing the system are obvious.

All of this analysis barely scratches the surface of the complexities of this bill which are canvassed in detail by Swanson Reed.

Surely enough is enough!

Can’t we just stop with the endless changes and have a period of stability?

Can’t we reverse the shameful cuts that mean we as a nation spend less on R&D as our competitors spend more?


Picture: Cochlear/manufacturing operations

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