The R&D Tax Incentive: It’s a Bad News Story Apparently

April 6, 2018 Kris Gale

The remarks of the Treasurer, Scott Morrison, about the R&D Tax Incentive (the Incentive) reported in today’s Australian Financial Review have focused attention on the program’s future after a long hiatus since the consultations that followed the release of the Review of the Incentive commissioned as part of the Prime Minister’s first (and only?) National Innovation Science Agenda. In fact, the only public statement in the past year has been a few paragraphs in the recent Innovation and Science Australia (ISA) “Australia 2030 Prosperity through Innovation” report highlighted in a recent MJA Update.

Now the Treasurer is foreshadowing an overhaul and relaunch of the Incentive in the upcoming May Budget. And the reasons behind this all seem negatively pitched: the program has been “taken for a ride”; people are claiming (presumable inappropriately) business-as-usual activities; the program has been writing “blank cheques”; “integrity needs to be restored”; and the Incentive is being used as “a proxy for achieving a lower tax rate”. All bad news indeed.

MJA welcomes the reigniting of the debate about the program’s design and its integrity. We will revisit the issues around R&D intensity and refundable claim limits in future Updates in the lead up to the Budget but we wanted to briefly set the scene for the relaunched discussion in this Update.

The AFR article says the recent ISA report delivered its advice in a context of rapid increases in the cost of the Incentive and allegations of widespread rorting. However, the facts on program cost indicate otherwise. On the back of the introduction of the annual company group claim limit of $100 million and the 1.5% offset rate cut in recent years, the cost of the Incentive is falling. Further to that, Australia’s Business Expenditure on Research & Development (BERD) is falling. The Australian Bureau of Statistics (ABS) reported a 12% fall in BERD in 2015/16. So the context of the ISA remarks must be challenged.

As to the rorting issue, MJA has been very strong on program misuse and has consistently called for a public analysis of the extent of the problem and potential solutions to improve program integrity. It is tiring to hear unsubstantiated allegations of program rorting being put forward as a reason for yet further cuts without such analysis having occurred.

In the upcoming weeks, MJA will be seeking to contribute our experiences around the responsible use of the Incentive made by the companies that we advise and meet on a day-to-day basis. The  good news stories are legion and tend to be ignored in the typical white noise about program cost and rorting. Over our more than 30 years of involvement in the Incentive and the predecessor R&D Tax Concession, we have seen up close the massive cultural impact of these two programs and the behaviour that has been underpinned by the legitimate use of this flagship innovation policy instrument. This good news must be heard.

Bad apples are a fact of any incentive program. To extrapolate that into a condemnation of the program overall as being the playground of a cynical corporate Australia is a form of cynicism that exceeds that which it seeks to attack.

The debate needs to hear all the stories of the Incentive. Not just the aberrant ones. MJA will be highlighting such stories going forward. We encourage all stakeholders to do the same in the lead up to and subsequent analysis of the upcoming Budget.

Should you wish to discuss this matter further, please do not hesitate to contact Melanie Reen or Sarah Lander on 02 9810 7211 or email info@mjassociates.com.au