The R&D Tax Incentive Review – Integrity Matters

October 14, 2016 Kris Gale

The R&D Tax Incentive Review (the Review) has been on the road this week with a series of briefing sessions conducted by AusIndustry around Australia. It is an interesting move as the Review contains exactly what it says it does – a series of recommendations. It is not a policy statement from government and it certainly does not reflect any intended legislative position as yet. Rather, we see it as being a (very) provocative launching pad for a grown up discussion about the future design and delivery of the R&D Tax Incentive (Incentive).

The Federal Government is seeking submissions by 28 October and this second MJA Update in a series of three continues to help set out the major issues raised by the Review.

In the previous Update, we outlined the context in which we believe the Review should be considered. We noted that the Review was written for an environment where the now-legislated 1.5% offset rate cuts, reducing the overall level of Incentive support by 10-15%, had not taken place. We went on to observe the Review’s curious adoption of the definition of a “large” company as being one with a turnover of $20 million or more and the misstep in connecting R&D support for the Non-Refundable Offset to a variable not directly connected to R&D behaviour ie. total group business expenditure. These last two issues will inform much of our analysis in our next Update which will suggest that the R&D Intensity test for the Non-Refundable Offset simply doesn’t work as an incentive/planning tool on any level.

In this edition, we look at the integrity recommendations (Recommendations 1, 3 and 6) put forward by the Review. Recommendations 1 and 6 have been generally well received. Recommendation 1 calls for the retention of the current definitions of eligible R&D activities and expenditures along with the development of new, clearer guidance. This is all eminently sensible. Recommendation 6 calls for an investigation into options for improving the administration of the Incentive (eg. single application process; single agency delivery; publication of claim information). The point to be made here is that the Review simply suggests that “options” be investigated and, whilst they do comment on some of these options, it is clear that it sees this investigation as outside the ambit of its brief so all parties should wait until when and if such a process commences before providing detailed commentary. We are not opposed to any efforts to seek to improve program efficiency.

The heat and light in the integrity recommendations is squarely found in Recommendation 3: Introduce a cap in the order of $2 million on the annual cash refund payable under the R&D Tax Incentive, with remaining offsets to be treated as a non-refundable tax offset carried forward for use against future taxable income.

MJA strongly supports the need to introduce a cap on the annual cash repayable under the Refundable Offset. We have advocated for such a measure since the 2008 Cutler Review of the National Innovation System. The current uncapped measure fails to strike a balance between an effective cash-based subsidy to assist emerging companies through the difficulties associated with R&D prior to commercial success and one that unnecessarily underwrites large loss-making enterprises that may never commercialise and provide a return to the economy through tax revenues. The Refundable Offset should form part of an innovation company’s funding strategy, not become its raison d’etre.

The highly predictable outcry from certain start up and sectoral lobby groups that the cash refund should remain uncapped betrays a refusal to engage in a debate about matters of affordability and balance. It needs to be remembered that the Review is proposing a change in the form of support, not the overall level. We are somewhat bemused that, fuelled by the Review’s proposal for an increase in the annual R&D expenditure claim limit to $200 million (a measure that our analysis suggests might help around five company groups at best, if at all), the small company lobby groups have responded to the raising of a cash refund cap by attacking the support offered to so-called “large” companies. This bemusement will become patently clear in our next Update where we illustrate how the proposed R&D Intensity criteria would eliminate virtually all current participants in the Non-Refundable Offset.

Whether a cap of $2 million is the right figure should be the focus of the discussions going forward, Already the public discourse is confused as to how many companies currently access the cash option and how many would be subject to the limit. We look forward to a reform that settles the principles and the levels based on evidence and measured analysis, rather than emotive opinion.

Speaking of which, we will be setting out our opinion (hopefully, it will not be seen as an emotive one) next time when we turn our attention to the vexed proposal concerning R&D intensity.

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