Those fans of the cinematic offerings of the Star Wars universe have high hopes for the latest release, “The Mandalorian and Grogu”. And those hopes can be summed up in two words. Pedro Pascal.
The critics and fans have been tortured for decades by the fact that nothing seems to have struck a chord like the original three films that began with “Star Wars Episode IV – A New Hope” in 1977. And we were thinking of that exact film when the Budget announcement of a ‘better targeted’ RDTI came out last week. Who can forget the thrilling final twenty minutes of that film as the Rebel Alliance pilots (think Luke Skywalker) were implored to stay on target as they sought to drop a big one on the Death Star?
So, if the RDTI is better targeted as announced and manages to stay on those targets, will that result in a better realisation of the ultimate target of a buoyant Australian innovation ecosystem?
Well, it’s two years before the changes are to be implemented but there is already much debate as to whether the new RDTI will perform as advertised.
Two things are apparent to us at this early stage:
- The changes are profound and there are too many questions already being asked to wholeheartedly endorse them.
- There is one aspect of the announcement regarding ATO audit resourcing that hasn’t received as much attention but the signal it sends does not bode well for any RDTI, let alone a better targeted one.
We will look at both these issues briefly with a view to encouraging further engagement with the Government to ensure that Budget 2026-27 is remembered as the next big step forward in Australian innovation policy.
Reshaping The RDTI
There is plenty of good stuff in the announcement including higher rates of benefit (approx. 4.5 percentage points), an increase in the refundability threshold (from $20 million to $50 million) and a lifting of the annual expenditure claim cap to $200 million.
Naturally, however, the focus is on the shortcomings and the two main ones that have attracted attention are changes that differed from the recommendations contained in the recent SERD Final Report and were not the subject of any consultation at all:
1. The 10 year Limit on Cash Back Refundability
It seemingly reflects the idea that the benefit is for start-ups only and decides that 10 years is the maximum time you can be considered to be a start-up.
Predictably, this has led to much criticism from the life sciences community as some of our most successful companies in that sector have barely cleared their throat in their first 10 years of existence.
Furthermore, more broadly, the refundability mechanism introduced in 2011 was not expressly aimed at start-ups and it has proved to be vital in assisting companies to pivot technologically and build new businesses that are based on R&D at various stages of their life, not just in their initial years.
We recognise the desire to constrain this ‘cash out’ feature of the RDTI but there are many ways that this can be better done rather than just bolting on a crude ‘first 10 years and you are out’ approach.
Further consultation in this regard is a necessity.
2. The Elimination of R&D Expenditure on Supporting Activities
There is a history to talk through about the concept behind the legislating of the two distinct categories of Core & Supporting Activities but, for now, the important thing to recognise is the available support has been the same for both categories since 2011.
And it is that fact that has meant that it doesn’t matter what companies and advisers claimed as eligible Core or Supporting R&D Activities because the tax benefit was the same. This has led to wildly divergent approaches to interpreting the legislative definitions in this area. The Budget suggests that 29% of the value of activities claimed are registered as Supporting Activities. This surprises MJA but other commentators see this as reflecting a conservative approach as to the appropriate breadth of Supporting Activities.
This change needs to be carefully legislated and delivered. Simply removing claims for Supporting Activities without resolving the ‘Is it Core or Supporting?’ conundrum will condemn us to years of disputes about what qualifies overall and what doesn’t, something which had been pretty much settled after 15 years in respect of the current RDTI.
Consultation on this issue is a must.
If we are correct on the need for meaningful consultation on these matters, the question arises as to how to do this.
In the past 18 months, the Federal Government has shut down ALL the consultation mechanisms available to stakeholders – the RDTI Roundtable has been suspended indefinitely and the State Reference Groups were amalgamated into the Stakeholders Reference Group (SRG) which was then recently “retired”. The reason given by the Government was that not all parties had access to it, and this was seen as inequitable. The irony of this last position was that it has been the Government who controlled the invitation list and it overtly limited who was able to attend, leaving others excluded from the meeting. Further, the monthly newsletters have moved to quarterly and there will be just two Program Insights webinars (the first one scheduled for 27 May) where the opportunity to submit questions is not yet apparent.
This complete shutting down of the engagement mechanisms is alarming and makes a mockery of any claims by the regulators to transparency.
MJA will be working hard to reverse that trend and we’ll keep you apprised of how well we do in that regard.
More Resources for ATO Audits
The Government has announced it will invest an additional $86.3m over four years from 1 July 2026, and $9.7m per year from 2030-31, into the Australian Taxation Office to expand and enhance its compliance activities and projects.
That investment includes targeted compliance activities over two years from 2026-27 to combat fraud, including in relation to the RDTI.
And these additional resources, announced on the basis of fraud without any public discussion thereof, come at a time when the ATO’s approach to assessments and audits appears driven by factors such as revenue recovery where mistakes prove fatal to claims, rather than making sure Australian innovators are appropriately supported by the RDTI and, where their claiming practices do need to improve, providing them with guidance and the opportunity to, dare we say it, stay on target with their claims.
For the RDTI changes to work, we have to get the right parties around the table and reach an accord as to how to deliver and monitor the program in a way that secures the ambitions of the Government. In this Budget, the Government has loudly recommitted to the RDTI as the right policy mechanism to achieve its ends. However, the announcements and the ‘better targeting’ will be all for naught if the program continues to be administered by the regulators in an aggressive fashion in audits of ever-widening scope that erode the confidence of the market in investing in R&D and claiming its RDTI due.
It’s an understatement to say that there is more to be said on this subject, but we’ll leave it there for now.
Enjoy the new Star Wars movie and make sure to say hi to Baby Grogu.
Should you wish to discuss any aspect of this article, do not hesitate to contact MJA.