Any mention of R&D Tax and Innovation was noticeably absent in the Federal Budget. KPMG R&D Tax specialists review what this means for the R&D landscape in Australia.
Perhaps recognising the complexities in the innovation landscape, the Budget didn’t contain any changes to the Research and Development (R&D) Tax Incentive.
This follows over 12 months of industry consultation under three Innovation Ministers and various reviews including the release of the Ferris-Finkel-Fraser Review (3F Review) by Innovation and Science Australia. The Federal Government is yet to respond to the 3F Review and thus future changes remain on the table.
Recent increases to the small business threshold and its income tax rate will also impact the R&D Tax Incentive; over the next 3 years the threshold for small business will increase to $50 million and the income tax rate reduce to 27.5 percent, providing small corporate businesses with a 16 percent permanent tax benefit from the R&D Tax Incentive (up from 13.5 percent).
Australia rates well on inventiveness but badly on both commercialization and collaboration. Currently, 28 out of 32 OECD countries use R&D tax incentives to support business R&D. While just one of many factors, firms do relocate to jurisdictions that offer worthwhile, stable support for innovation. Australia’s R&D incentive has been one of the most generous, but despite this, Australia’s business expenditure on R&D as a percentage of GDP lags, as can be seen in the chart below.
Finding the right mix of incentives is difficult and assessing their return on investment even more so. The rapidly increasing cost of the R&D Tax Incentive program presents a dilemma; how to balance encouraging innovation without subsidising activities which don’t create new knowledge or technology. In theory, a tax incentive that provides greater additionality will provide a better return, but successful implementation remains elusive.
In Australia, the 3F Review made six recommendations, two of which are designed to reduce the cost of the program and one of which is intended to increase additionality (intensity threshold). However while additionality is a laudable objective, it is almost impossible to design for or measure and debate on how to achieve it is mired on all sides.
Sources close to the Minister for Industry, Innovation and Science advise R&D is an important issue for the Federal Government and still on its agenda. The intended approach is that any changes will be phased in to enable business to incorporate into planning and forward strategy.
Within this landscape, financial officers, heads of tax and general managers should help their R&D managers and product innovation teams with new thinking around grants and tax incentives. To this extent, strategic planning and use of resources will be key to providing competitive advantages.