Meet The New Bill. Same As The Old Bill.

March 8, 2020 Kris Gale

Rock and roll fans might recognise the source material of the above quote as being The Who’s “Won’t Get Fooled Again”, Roger Daltrey giving voice to the entrenched frustration Pete Townshend utilised to drive that band to greater and greater heights. (Incidentally, after 16 years, The Who has just released “WHO”, an album that further cements their legacy and is well worth checking out.)

And so it is with the Bill currently before the Federal Parliament, which introduces a series of reforms to the R&D Tax Incentive (the Incentive). Close inspection reveals that the Bill is virtually unchanged from the first version that was unanimously rejected by the Senate Economics Legislation Committee (SELC) in February 2019. The new Bill has been immediately referred to the SELC with a report back date of 30 April and submissions can be lodged on or before 6 March: ­­­­­­­­­­­­HERE

In summary, MJA believes that the unanimous rejection of the first Bill by the SELC comprising Government, Opposition and Cross-Bench Senators should be repeated with respect to the review of the second Bill as it is legislating a major reduction in R&D support at a time when the Australian innovation economy can least afford it. Since 2015, the Incentive has had rate cuts, annual claim limits and controversial administrative practices imposed upon it. The net result is that the cost to revenue of the Incentive has fallen significantly as program participation has tailed off and R&D activity has been repressed. The program’s KPI, BERD as a percentage of GDP, has slumped below 1%. This is further evidenced by the recent slew of reports documenting Australia slipping down the international innovation measurement ladders. One would think that the Government would be seeking to bolster the effectiveness of the Incentive in the current environment rather than subjecting it to further cuts and restrictions. But this is incontrovertibly not the case.

Previous MJA Updates, ­­­­­have forensically detailed the issues with the Bill that prompted its unanimous rejection by the SELC: an illogical and unworkable intensity test that slashes support for companies turning over $20 million or more annually; a further paring back of assistance for smaller organisations; yet more “enforcement” resources; an unprecedented compulsion to publish a company’s claim amount in exchange for the right to access the Incentive and so on.

All these features have been retained in the Bill despite the concerns clearly detailed in the SELC Report. In fact, our comparison of the Bill reveals the following differences only:

1. The intensity rate changes for the Non-Refundable R&D Tax Offset (see discussion below)
2. The start date of the Bill has been pushed back from 1 July 2018 to 1 July 2019 which means that, if enacted, it will have retrospective effect
3. Changes to Part IVA (s 177) to individually identify the Refundable R&D Tax Offset and the Non-Refundable R&D Tax Offset. This means that, of all the offsets, only the foreign income tax offset, the innovation tax offset (early stage venture capital limited partnerships and ESIC), the exploration credit and now R&D are specifically identified. There is no explanation of why this is needed and how this will separate behaviour changes inspired by the program and its compliance methods to get the tax benefit as opposed to inappropriate schemes to get the tax benefit.
4. Minor and irrelevant corrections to the note in s 40-293, the titles in Subdivision 355-H on balancing adjustments and a renumbering of the claim publication provision from 3G to 3H in the Tax Administration Act 1953

The two Bills are virtually identical and most attention has focused on the reworking of the rates of tax offset associated with the proposed intensity requirements for Non-Refundable R&D Tax Offset companies. 

First of all, in order to meet the current available level of support under the universal offset rate of 38.5%, a company group would need to have an R&D intensity level of 13%. This was 13.25% under the first Bill. Most organisations will get nowhere this result and will be worse off. So no improvement here.

Secondly, commentators accept that the vast majority of claimants will fall within the new Bill’s bottom intensity tier of 0% – 4% and only be eligible for an anaemic offset rate of 34.5%. This is half a percentage point up from the first Bill but the intensity parameter has jumped from 2% to 4%. Neither the Triple F Report or Innovation and Science Australia were prepared to posit an intensity rate greater than 2%. Treasury clearly has no such qualms.

This reduction will decimate participation rates in the Incentive. In the program’s 35 year history, the lowest level of permanent difference is 7.5%. This Bill drops the level from 8.5% to 4.5%, an historic low by 3 percentage points. When you factor in compliance costs (generally regarded as 2% and growing), the impact of the second Bill is to reduce the net support from a net 6.5% to 2.5%. This represents a slashing of support by more than 60%. This is not sustainable and will drive the Incentive to the point of irrelevance for the incredibly diverse range of organisations doing R&D with a turnover above the modest level of $20 million.

MJA understands the repetitive tone reflected in the following request but it is imperative that interested parties make their concerns known by making a submission to the SELC by Friday, 6 March: and by offering to appear in front of the Committee. MJA notes that the last SELC process was marred by the fact that the Treasury did not post the non-confidential submissions during the SELC process. In fact, the submissions only appeared a month or so ago, some 18 months after the close date. We feel we are entitled to an arched eyebrow regarding that matter, particularly as a review of the finally-published submissions revealed that 74 out of 76 opposed the Bill. Pressure should be exerted to make sure that the submissions are posted as soon as practical after the close date.

MJA will keep you fully up to date regarding the conduct of the review and the status of the Bill. The outcome will have a massive impact on Australia’s innovation future.

Should you wish to discuss this matter further, please do not hesitate to contact Kris Gale on 02 02 9810 7211 or email kris.gale@mjassociates.com.au