The R&D Tax Incentive: It works and it works well

December 13, 2017 Ian Ross-Gowan

It has to be said that it’s been a tough couple of years for the R&D Tax Incentive (the Incentive). For what is meant to be available to the market as a planning tool, it’s taken a number of hits that have seen the program being regarded as anything but stable and certain including:

• The introduction of the $100 million R&D expenditure cap which has limited R&D by large businesses in Australia and R&D opportunities for suppliers to large businesses
• The 1.5% R&D tax offset rate reduction which, when combined with the income tax rate changes, has cut the net after-tax benefit for the vast majority of taxpayers
• The sharp increase in the level of compliance activity from both AusIndustry and the ATO with a strong focus on rejection of whole of claims where shortcomings are being identified
• The continuing uncertainty surrounding the recommendations contained in the ‘Triple F’ report into the Incentive which was commissioned more than two years ago

These issues, along with other factors, have seen Business Expenditure on R&D (BERD) fall substantially in Australia in recent times. Coupled with this drop in BERD has been a lot of bad press about the Incentive itself. Whilst some of this has focused on rogue elements, this has been largely undeserved. As with every aspect of tax administration, if taxpayers are genuinely and appropriately seeking to be compliant in claiming no more and no less than they are entitled and errors are made, this is a system failure, not an individual’s failure. Where press reports have focused on matters such as the company claiming R&D is associated with a person who has been a bankrupt or their dating habits then this is irrelevant to the integrity of the program.

In this environment, it is worthwhile to focus on what is important: The Incentive works. It is an important part of our economy and our future development. The drop in BERD each and every time the program is made more restrictive shows that it does impact positively on business decision making processes. It does encourage R&D activity in Australia that otherwise may not have happened. The reviews by various government authorities and economists all agree that directly measuring the net benefit the program has provided separately from other forces in our economy is not possible. However, most of these studies have also agreed that the program has helped create more economic growth and taxation revenue than it has ever cost the Government in forgone revenue. Apart from the benefits of specific R&D activities and projects encouraged and supported by the Incentive, the way it has fostered improvements in knowledge creation and knowledge management has made Australian business better.

At MJA, we have a great family of clients, past and present, who have created incredible things over the decades. It is an honour to work with these clients and a privilege to assist them through periods of great innovation and achievement. We get to see close up the fact that most of these businesses come out stronger and better as a result of accessing the Incentive as part of their innovation funding strategies. We don’t shy away from the fact that there remain challenges in the program and we will, as ever, seek to overcome these in the coming years.

For now, we would like to take the opportunity to wish you all a very Merry Christmas and a Happy New Year!

Should you wish to discuss this matter further, please do not hesitate to contact Ian Ross-Gowan on 02 9810 7211 or email ian.ross-gowan@mjassociates.com.au