The Australian Government has released exposure draft legislation for proposed changes to the R&D Tax Incentive, its key support program for business R&D. If enacted, the amendments will take effect in the financial year 2018-19.
The stated objective of the proposal is to better target the government investment, which peaked at around $3 billion in 2016-17. It follows the 2016 Review of the R&D Tax Incentive, and the Innovation and Science Australia 2030 Strategic Plan, which found that the program did not fully meet its policy objectives, particularly in inducing business research and development expenditure beyond business as usual activities.
But in its effect, the proposed changes would result in a major reduction of government support, with net savings estimated at $2.4 billion over the next four years.
In a recent blog, R&DTI expert Kris Gale from Michael Johnson Associates comments that the non-refundable offset "in its current form will be the single worst change in the more than 30 year history of the program".
He also asks respondents to the exposure draft legislation to consider whether there is a need for a $2.4 billion over four years reduction in innovation support at a time when business expenditure on R&D is falling in Australia. Read his blog here.
The proposal includes a series of compliance, enforcement and administration changes to improve the program's integrity. For example, in a move to increase transparency the Australian Tax Office will publicly disclose company details including the amount of R&D expenditure claimed.
However, the most pronounced effect will be in the amount of support businesses will be able to claim for their expenditure on R&D.
Under the current rules, Australian companies with aggregated annual turnover of $20 million or more can receive a 38.5% non-refundable tax offset for their eligible R&D expenses.
With the proposed amendments, this non-refundable R&D tax offset will be incrementally tied to business R&D intensity (that is, the ratio of a company's R&D expenditure to its total expenditure in a given tax year).
Proposed for eligible businesses with aggregated turnover of more than $20 million annually: the non-refundable R&D tax offset will be based on the company tax rate plus:
The Government also proposes to increase the maximum amount of R&D expenditure eligible for concessional R&D tax offsets from 100 million to 150 million.
The current arrangements for small to medium sized companies with an aggregated annual turnover of less than $20 million is a 43.5% refundable tax offset (refundable means it can not only bring a company's total tax liability down to zero, but the excess is then refunded to the company in cash.
Under the proposed new arrangements, the refundable tax offset will not be a fixed percentage, but will be calculated as a premium of 13.5% percentage points above a company's tax rate.
Notably, though, there will now be a cap to cash refunds set at $4 million per year, although this will not apply to clincal trials.
The consultation period with the public will end on 26 July 2018. If enacted, the changes would take effect for the financial year 2018-19.