The findings of the R&D Tax Incentive Review have been released.
The Incentive is the federal government's main mechanism to support industry investment in R&D, accounting for around one-third of the $9 billion of total government support for innovation. In 2013-14, the scheme supported around 13,700 entities performing $19.5 billion of R&D at an estimated cost to
government of $2.95 billion.
Australia, the Netherlands and Canada stand out among OECD countries in supporting business R&D mainly through an R&D Tax Incentive. As a share of total government funds for R&D, Australia's Tax Incentive scheme was only surpassed by the Netherlands in 2012. Neither Germany, Sweden, Finland nor New Zealand use this kind of measure, but rather support business R&D directly, such as through competitive grants (click infographic to explore.
Infographic on direct and indirect government support for business R&D across OECD countries in 2013. Click image to explore.
Infographic published by OECD
The chair of Innovation Australia Bill Ferris, Australia’s chief scientist Alan Finkel and secretary to the Treasury John Fraser undertook the review to assess the effectiveness and integrity of the R&D Tax Incentive, and to identify opportunities for improvements.
The panel found that the program falls short of meeting its stated objectives of additionality and spillovers, and could be better targeted. It provides six recommendations to improve the scheme, in particular in the way it supports collaboration between industry and research institutions, for which it recommends providing a higher tax offset.
The R&D Tax Incentive provides:
a 45% refundable tax offset for eligible entities with a turnover of less than $20 million per year and provided they are not controlled by income tax exempt entities; and
a non-refundable 40% tax offset for all other eligible entities. Unused non-refundable offset amounts may be able to be carried forward to future income years.
Collaboration is not a focus of the current scheme, which the panel believes is a lost opportunity.
The panel's six recommendations (edited*) include:
Retain the current definition of eligible activities and expenses
under the law, but develop new guidance, including plain English summaries, case
studies and public rulings, to give greater clarity to the scope of eligible activities and expenses.
Introduce a collaboration premium of up to 20% for the
non-refundable tax offset to provide additional support for the collaborative element
of R&D expenditures undertaken with publicly-funded research organisations.
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.
Introduce an intensity threshold in the order of 1% to 2%
for recipients of the non-refundable component of the R&D Tax Incentive, such that
only R&D expenditure in excess of the threshold attracts a benefit.
If an R&D intensity threshold is introduced, increase the
expenditure threshold to $200 million so that large R&D-intensive companies retain
an incentive to increase R&D in Australia.
That the Government investigate options for improving the
administration of the R&D Tax Incentive and additional
resourcing that may be required to implement such enhancements. To improve
transparency, the Government should also publish the names of companies claiming
the R&D Tax Incentive and the amounts of R&D expenditure claimed.
*For the unedited list of recommendations download the report.
In releasing the report, Minister for Industry, Innovation and Science Greg Huntannounced it would consider the report in three phases, the first including submissions until 28 October 2016 and roundtable discussions with industry. Further discussions in November and December will then be followed by the Government's response expected to be finalised before the end of March 2017.
