Budget 2018: Changes to the R&D Tax Incentive

BSI Admin

Changes to the R&D Tax Incentive (RDTI) announced in Tuesday night’s Federal Budget are heavily focused on cost reduction and enforcement, and may risk further depressing the level of business investment in experimental R&D by Australia’s private sector.

In summary, the major changes include:

  • Changing the rate of refundable R&D tax offset to a fixed 13.5% premium above the claimant’s applicable company tax rate;
  • Amending non-refundable R&D tax offset rates to provide increasing benefits to companies with a higher levels of “R&D intensity” (being R&D expenditure as percentage of total expenses);
  • Introducing a $4 million annual cap on cash refunds for R&D, with amounts above the cap converted into non-refundable offsets, which can be carried forward to future periods.  Refundable tax offsets for clinical trials will not be capped;
  • Increasing the $100 million annual R&D expenditure threshold to $150 million;
  • Strengthening anti-avoidance rules, and providing additional resources to the ATO to help ensure ineligible R&D claims are denied;
  • Publishing details of companies claiming the RDTI and the amounts they claim; and
  • New binding Innovation and Science Australia guidance on the scope of eligible R&D.

Some may argue it is business-as-usual for smaller companies.  Certainly for most startups and smaller SMEs eligible for the refundable tax offset, the introduction of a new $4m cap on the maximum annual cash refund will impact only a few.  The further carve out exempting clinical trials from the cap will also help ensure this number remains relatively small.  However, the decision to change the rate of refundable tax offset to the company tax rate plus a 13.5% “premium” does represent a reduction relative to current refund entitlements.  Whilst arguably a small decrease, this will be keenly felt by loss-making startup-ups trying to maximise available cash during their R&D phase.

For larger company groups accessing the non-refundable R&D tax offset, the impacts are more significant.  The introduction of a sliding scale of non-refundable tax offsets pegged to a new measure of “R&D intensity” adds yet more complexity, and all but removes any meaningful support for larger company groups where R&D investment forms less than a significant proportion of their overall business activities.  The government is presumably seeking “additionality” at the recommendation of the Chief Scientist and Innovation and Science Australia, however, this measure risks driving those making the most significant investments in R&D in dollar terms to other, more supportive tax jurisdictions.

The foreshadowed revision of anti-avoidance rules specifically for R&D combined with increased resourcing of the ATO is welcome, as is the proposal for new binding technical guidance to be issued by ISA.  However, the plan to publicly disclose the name of each applicant and the amount they claim is commercially sensitive information to many companies and may act as a further deterrent for firms to disclose their activities to access R&D support.

Long-term integrity of the program is critically important, and the government is to be commended for recognising it was past time to act.  But taken together, these latest changes reduce the benefits available for most applicants, and appear contrary to the original intent of the Incentive itself.  Negative media coverage and increased complexity and compliance risks already sit uneasily with companies wishing to validly access the program.  With apologies to Ken Henry, from these trenches it is difficult to see this as the self-assessment incentive program it is intended to be.

Australian Business Expenditure on R&D (BERD) is in decline, and the “end of the mining boom” excuse for the downward trend is losing its legitimacy.  We fear the impacts of these changes and the consequent reduction in support for companies taking the big technical risks on behalf of us all will be felt for more many years to come.

Please see the fact sheet (https://www.budget.gov.au/2018-19/content/factsheets/6-tax-integrity.html) for further details on the changes announced in Tuesday’s Federal Budget.  BSI will provide a further detailed outline of each change as the relevant Bills are released for consultation, or otherwise introduced in the House of Representatives.