R&D Tax Incentive: The Debate Around The Merits Of The $100 Million Cap

February 24, 2015 Kris Gale

The recent introduction of the $100 million R&D expenditure cap on R&D Tax Incentive (Incentive) claims as a result of the PUP Amendment to the The Tax Laws Amendment (Research and Development) Bill 2013 has been received with a degree of genuine surprise. The fact that the measure was pushed through without public consultation, without apparent costings and without a clear administrative process (as discussed in our most recent MJA Update) has left many taxpayers scratching their heads. The Government has indicated that the forward savings to revenue foregone are approximately the same as expected with the $20 billion exclusion clause and it has confirmed that more taxpaying groups will be caught by the change without any real detail as to who and how many.

A number of media reports have suggested that this is the end of the matter in terms of cost saving changes to the Incentive and that most R&D claimants have dodged the bullet. This couldn’t be further from the truth. The ongoing spectre of the Tax & Superannuation Laws (2014 Measures No. 5) Bill 2014 which introduces an across-the-board cut of 1.5% to the R&D Tax Offset Rates of 40% and 45% from 1 July 2014 looms large over the program with no clear timetable as to when it will be debated in the Senate. We will review the headline issues with that Bill in our next MJA Update as it represents a much deeper hit to the bottom line of Federal government support for innovation. Prior to that, we would like to dispel a few of the myths that have emerged in the public discourse since the $100 million expenditure cap was legislated.

A number of media reports have contained feedback from smaller innovators that they perceive the cap to be a good thing and that they are likely to conduct more R&D in the wake of the announcement which is likely to see larger companies winding back and/or offshoring their R&D programs.
Let us briefly consider each of the reasons put forward in support of the position that the cap is a good thing and we will challenge the thinking contained therein:

The cap is the end of it. There are no more savings proposed for the Incentive.

Incorrect. The 1.5% across-the-board rate cut awaits approval in the Senate.
The Bill that introduced the cap was called Targeting Access. The savings associated with the cap means that the program can now better target small-to-medium companies (SMEs) as the savings will be directed to them.Incorrect. The cap is a revenue saving measure, pure and simple. Not one dollar is being directed to other innovation programs, let alone other users of the Incentive. Taxpayers unaffected by the cap still receive exactly the same benefits as they did prior to the cap. Further, the Budget Bill that cuts the R&D Tax Offset rates means that support is set to drop for all R&D claimants.
Introducing a handicap for large innovators is a good thing as they take too much of the Incentive’s support and they crowd out smaller companies from doing R&D.

Unsustainable. The cost of the Incentive is determined by its uptake. Large innovators spend more and get their previously-uncapped claims at the rate of 40%. Small innovators receive 45%. The SMEs will continue to get the same support after the cap. For a small information technology company to suggest that they are now more likely to do R&D because a larger competitor has been hamstrung by the Government seems somewhat disingenuous.
Handicapping the large R&D companies will result in retrenchments, giving access to the released labour to smaller companies who will take up the R&D slack.

It’s a long bow to draw to say that causing large companies in a sector to retrench staff will see an improved innovation outcome as these people accept employment in the smaller end of the market. Did someone say brain drain overseas?

The answer, of course, lies in the understanding that Australian companies are not competing for a finite amount of R&D support that accordingly pitches large and small companies against each other in a battle for assistance. The beauty of the uncapped Incentive lies in the fact that each company receives the full support associated with its R&D spend. Hampering the large end is actually likely to hit hard through all the linkages in our innovation economy including the small companies whose R&D outputs are purchased, acquired and utilised by the large players in a myriad of ways.

The impacts of the cap have barely had time to be thought through and it is abundantly clear that a pathway needs to be carefully mapped out to minimise the negative impacts it could well wreak on Australia’s innovation culture.
Should you wish to discuss this matter any further, please do not hesitate to contact Kris Gale on (02) 9810 7211 or kris.gale@mjassociates.com.au