R&D announcements confirmed for budget night – but are they positive or problematic?

Early Federal Budget comments by the Treasurer have made it all but certain that the Government will make significant R&D tax program announcements on Budget night.

The Review of the R&D Tax Incentive report, released in September 2016, originally made six recommendations, with an immediate consensus that the less popular recommendations including an intensity threshold were impractical. Subsequently the 2030 Innovation & Science Australia Strategic Plan, released in January 2018, suggested improvements to two of the original recommendations.

The main focus of criticism has been that some businesses have been accessing more than their fair share of incentives, and questions around whether what was being claimed was actually making a meaningful contribution towards innovation improvement.

The Treasurer’s recent comments suggested that the program will be relaunched saying:

Our focus is to relaunch an R&D tax incentive that is all about R&D additionality, things that would not have happened anyway, and rewarding the intensity of that effort.

He is echoing the language of ‘spillover’ and ’additionality’ used when the R&D Tax Incentive program was first unveiled in 2009. That said, the perception clearly remains that the program requires further fine-tuning to achieve the intended innovation policy outcomes and integrity.

Refunds capped annually and cumulatively

Annual caps on amounts that can be refunded have been recommended at AU$4 million, as well as a maximum cumulative refund cap (recommended at AU$40 million). The treatment of remaining offset amounts remains uncertain.

This is a controversial recommendation, especially for life science and high growth technology companies that can face difficulties in obtaining funding, often for long and intensive R&D programs. Low annual caps could result in the unwelcome staggering or delaying of research activities.

This would also require broad integrity measures to prevent the splitting of R&D activities across companies. A cumulative maximum will also create the need for tracing measures to account for company and project movements, and further integrity provisions to prevent avoidance over time.

Overall verdict: could be problematic, especially for industries such as life sciences where entities may have already made significant R&D investments, and decided on Australia as a location from a strategic perspective, based on the existing R&D rules and benefits. More needs to be shared on potential grandfathering arrangements for existing R&D projects, as well as the “tracing” R&D claims for the purposes of the $40m overall cap.

Intensity threshold

The language used by the Treasurer suggests that an intensity threshold for the non-refundable component of the incentive may be introduced with a view to encouraging incremental R&D. For example, the recommended requirement for an R&D spend of 1 percent of total ‘annual expenditure’, with all eligible R&D expenditure attracting the benefit once the threshold has been reached.

Such a blunt mechanism may dis-incentivise those companies below the threshold to undertake any R&D, and incentivise those above the threshold who will obtain a benefit for all expenditure, even if not incremental.

Given potentially high levels of general “annual expenditure”, industries such as manufacturing and fast moving consumer goods (FMCG) will likely be unduly impacted in meeting the expenditure threshold. Other industries will also have to manage costs that are influenced by factors outside of their control (e.g. commodity prices), which contribute to the calculation of the intensity threshold. Indeed, unless a base or prior year threshold is envisaged, companies may be tracking a moving target, detracting from the concept of the program being an ‘incentive’.
Regardless of how the threshold is defined, this will create uncertainty in forecasting the availability of the incentive each year. Such a feature could also result in aggressive positions being adopted to reach minimum expenditure thresholds.

Overall verdict: problematic. If it eventuates, this would be an unwelcome feature of Budget night for many, with a number of industry bodies already canvassing their members to test its potential impact.

20 percent collaboration premium

It is likely that Budget night will see the introduction of a collaboration premium of up to 20 percent on the non-refundable tax offset. This could provide additional support for businesses undertaking R&D activities with publicly-funded research organisations. The premium could also apply to the cost of employing new STEM PhD or equivalent graduates. The finer details of the proposed premium will be of much interest to universities and businesses alike.

Overall verdict: potentially positive.

What next

Companies that expect to be materially affected by the Budget announcements must quickly evaluate the Government’s final decisions and policy measures once announced. It is likely that the window to potentially influence policy will be short.

Whatever the outcome of the next few months, it is to be hoped that this round of legislative amendments will be the last for a significant period of time. Confidence in the longevity of the program needs to be restored for those taxpayers with R & D initiatives still eligible under the revised program.

Importantly, although the Government discusses the issue within the context of spillover and additionality, the reality is that the R&D tax incentive is also a location-focused incentive, seeking to attract R&D to Australian shores and retain the talent conducting these R&D programs within the country. It is hoped that this period of uncertainty, and the potential changes, will not detract from the perception of Australia as an innovation-friendly destination.

Deloitte will be reporting live from Canberra on 8 May, sharing key takeaways and analysis as this year’s Budget announcement unfolds. Be the first to know by pre-registering.


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