Senate Inquiry Into The R&D Tax Bill Went Looking For Supporters Of The R&D Intensity Test. Guess What They Found?

November 22, 2018 Kris Gale

Question: What do the following groups have in common? Universities Australia, Medicines Australia, Chemistry Australia, Northern Minerals, Australian Information Industry Association, Western Australian Government, AusBiotech, BioMelbourne Network, Deloitte, BDO Australia, RSM Bird Cameron and us?
Answer: None of these groups support the proposed introduction of the tiered R&D Intensity test to the Non-Refundable R&D Tax Offset or the other Budget savings measures.

How do we know this?
Because this was the witness list at last Friday’s public hearing into the proposed R&D tax changes conducted by the Senate Economics Legislation Committee (the Committee). [Catch all the action here: http://parlview.aph.gov.au/mediaPlayer.php?videoID=426078&operation_mode=parlview; http://parlview.aph.gov.au/mediaPlayer.php?videoID=426148&operation_mode=parlview]

By the time the various government representatives from Treasury, IIS, the ATO and AusIndustry appeared, the presiding Senators felt compelled to ask if there were any supporters of the proposed changes as no-one had emerged to date. Unsurprisingly, the government representatives took the question on notice. They’ll be up against it. Of the 64 submissions received (an outstanding result in the narrow timeframe provided), MJA understands that none support the changes in the current form. Not one. [The submissions can be viewed here: https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/TLABMultinationalsTax/Submission]

There is so much that could be said about the proceedings and an objective observer could only conclude that the Bill is on the shakiest of grounds for the many reasons that have been articulated in previous MJA Updates and that were well ventilated by the witnesses at last Friday’s hearing.

Let us give you just one example why.

The Government has indicated that the changes will reduce R&D support by $2.4 billion in the next four years according to the forward estimates. Yet, at the hearing, the Government’s representatives submitted that there would be no net behavioural response in the Australian claiming community. When asked what was the basis of this position by the Senators, the response was that this was a judgement call being made by the authorities as no modelling had been done. When the Senators asked if they could see the data behind the “judgements”, the request was, take a guess, taken on notice.

So what’s MJA’s judgement? We will just focus on the benefits available under the new regime whilst noting that it is commonly accepted that compliance costs under the new regime will increase.

On the Government’s own numbers, 180 claimants of the Non-Refundable Offset will be better off under the proposed changes which means that 1,765 companies will be worse off. Of the approximately 13,000 claimants of the Refundable Offset, all those with a tax rate less than 30% going forward are worse off. Plus 20 of them will get less cash back due the annual $4 million annual cash limit. None of them are better off. So the ‘no net change’ result, despite the large reduction in support would mean that those 180 companies will be doing some very heavy lifting for the other 15,000 odd claimants. Some very heavy lifting.

Our judgement? The government representatives are simply wrong. The changes would see a range of negative effects – companies exiting the program, companies relocating R&D to other jurisdictions, cuts to existing and proposed R&D budgets, the list goes on. The continued slide in BERD that Australia is currently experiencing would continue apace and it would do at a precipitous rate.

The universal rejection of these changes by the Australian innovation community as evidenced by the Committee’s proceedings is unquestioned and the Government surely cannot persist with this Bill.

The Committee was to report back on 3 December. This has now been extended until 11 February and there is word that there may be the chance to make follow up submissions and participate in further public hearings. MJA will keep you fully informed of all developments.

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