A Call to Arms: A Matter Of YOU Asking The Right Questions About This Proposed Cut To Innovation Support

July 6, 2018 Kris Gale

This MJA Update is an unusual one for us because we are asking you to consider what impact the Exposure Draft on the R&D Incentive changes could make to your business and we are asking you to make your views known as a matter of urgency.

The recent release of the Consultation Paper, accompanying the draft legislation and Explanatory Materials associated with the 2018/19 Budget measure – ‘Better targeting the research and development tax incentive‘,  sees the Government asking a series of six questions associated with the implementation of the proposed changes. Submissions are due by 26 July 2018.

The questions seek feedback on matters associated with compliance challenges, integrity and unintended consequences with respects to three aspects of the R&D Tax Incentive (the Incentive) reforms:

• Calculation of R&D Intensity – total expenditure
• Clinical Trials exemption under the $4 million refund cap
• New arrangements for Clawback for recoupments and feedstock revenue (an aspect not announced at Budget time which seek to clean up some anomalies in the current legislation and to reduce the value of affected claims in the hands of smaller taxpayers).

They come from an expected viewpoint that the changes are a fait accompli and they are administrative and technical in nature. Sadly, what they don’t ask are more fundamental questions like the following:

• Do you accept the need for a $2.4 billion reduction in innovation support in the next four years at a time where BERD is falling in Australia and the overall cost of the Incentive is falling?
• Are the changes the best way to deliver such a budget cut or are there alternatives?
• What are the expected impacts of the changes on your business?
• Do the changes reduce or increase the incentive for you to carry out R&D?
• Do the changes make it more less likely or more likely that you will do R&D in Australia compared with overseas?
• Do the changes increase or reduce your expected compliance costs associated with claiming the Incentive?
• Will you continue to claim the Incentive going forward? and, finally
• Do you agree with Senator Michaela Cash, the Minister for Jobs and Innovation, when she says, “By better targeting R&D investment, these changes will lead to new ideas, products, services and jobs”?

The questions have not been put to the Australian innovation community in the Consultation Paper yet they merit the Government’s immediate attention. Recent MJA Updates have set out in detail the profound problems associated with the Budget package, in particular, with the proposed Non-Refundable Offset and are worth revisiting. The bottom line is that, if the changes go through in the current format, then the vast majority of eligible taxpayers will receive the lowest offset rate of 34%, down from the current 38.5% as they will have an R&D intensity of less than 2% based on the announced calculation method. In other words, their permanent difference will fall from 8.5 cents in the dollar to 4 cents. This is a historic low for the Australian program (previously 7.5 cents) and it is our understanding that it would be a new record for the lowest rate of R&D tax benefit offered globally.

As one well-known Australian company put it to MJA, moving from 8.5 cents to 4 cents is not a halving of support as it first appears. When you take into account the expected increased compliance costs which the company estimated as 2 cents, it is a “more than two-thirdsing”.  If you think that through, what will your answers to the unposed questions set out above be? The potential damage to the Australian innovation system may clearly be seen. If it’s not worth claiming, the R&D culture built around the Incentive over the past 30 years will be in serious retreat as taxpayers desert the program as they did in 1996 when the Coalition reduced the R&D Tax Concession rate from 150% to 125%.

MJA believes that the Non-Refundable Offset in its current form will be the single worst change in the more than 30 year history of the program. Under the R&D intensity test, a company group will need to have an intensity level of greater than 13.125% to match the 8.5% received from the first dollar of eligible R&D under the current provisions. Companies in that situation will be the privileged few. The R&D intensity level will always be primarily determined by the group’s overall expenditure which is influenced by a myriad of factors like industry margins, company lifecycle and external cost variables, most of which are largely (or entirely) out of the group’s control. That is why most companies don’t have the ability to increase intensity significantly and the new provisions certainly don’t offer much incentive to get to a higher R&D intensity bracket as the higher R&D tax incentive rates only apply to the incremental dollars.

So, the purpose of this Update is to encourage all Australian taxpayers to review the proposed measures and consider the answers to the unasked questions. If you are worried by the outcomes, we entreat you to make a submission by 26 July and make your views known. We appreciate the many competing demands on your time and, yes, MJA , along with many other passionate stakeholders including industry associations and advisers, will be flying the flag. But there are no more powerful voices than companies in this debate and this is simply not the time to rely on the endeavours of others. Go further. Seek an invitation to the face-to-face consultations with the Government that will be occurring. Contact all sides of Parliament. Make your views known to the Treasurer and the Minister for Jobs and Innovation and their Opposition counterparts. Even consider contacting your local member. This is the big one.

Do not hesitate to reach out to MJA to assist you in the making of all these approaches. And, in particular, if you believe the move to the new Non-Refundable regime is a positive one, please contact us. We would love to hear your perspective so that you get a fair hearing. To date, we are thinking that there aren’t many of you out there.

If you have any questions about the consultation process, or if you would like to be involved in this process, please call Kris Gale on kris.gale@mjassociates.com.au or 02 9810 7211.