Recommendations to ‘refocus’ innovation funding | KPMG | AU

Recommendations to ‘refocus’ innovation funding may impact thousands of companies

Recommendations to ‘refocus’ innovation funding

David Gelb discusses the ISA's recommendations on Innovation, their benefits and disadvantages.

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Global Head R&D Tax Incentives

KPMG Australia

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Yesterday Innovation and Science Australia (ISA) released its ‘Australia 2030 Prosperity through Innovation: A plan for Australia to thrive in the global innovation race’.

The 117 page report contains 30 recommendations across five imperatives and a roadmap designed to improve Australia’s innovation and science performance by 2030.

For industry, the report contains a mixed bag of recommendations which will benefit some companies and industries and disadvantage others. For instance:

  • Recommendation 6 (intensity threshold). The introduction of a one percent intensity threshold for the Research & Development (R&D) Tax Incentive which may knock out R&D claims by many current non-refundable R&D offset companies (turnover greater than $20m) spending less than one percent of their annual expenditure on R&D. The threshold is calculated by reference to ‘total expenditure’ which may or may not include Capital Expenditure (CAPEX). Companies may not know whether they meet the threshold until near or after the end of the income year, making it difficult to manage compliance. It is also unclear whether companies that fail the intensity threshold will be able to access the collaboration premium (see below). This is a modified version of the 1-2 percent intensity threshold proposed in the 2016 ISA review of the R&D Tax Incentive (3F Report). Importantly in the current report, once the threshold ‘trigger’ is reached, expenditure below the threshold amount attracts the R&D benefit. By the same token, the current recommendation doesn’t include an increase to the non-refundable cap (from $100M to $200M as proposed in the 3F Report).
  • Recommendation 6 (refund cap). The introduction of an annual cap on the refundable R&D tax offset of $4M and a lifetime cap of $40M. This goes further than the 3F Report recommendation which only proposed a $2M cap and didn’t include a lifetime cap. This will be of greatest concern to high cost long term R&D such as that done in the med-tech, pharma, Information, Communications & Technology (ICT) and mining industries.
  • Recommendation 6 (CRCs, Industry Growth Centres). The expansion of funding for Cooperative Research Centres (CRCs), CRC projects and Industry Growth Centres (IGCs) will be good for industries ISA considers have ‘competitive strength and strategic priority’, but may mean less funding for niche industries or those ISA doesn’t consider a strategic priority. 
  • Recommendation 7 (export market). Increased funding for the Export Market Development Grant (EMDG) program along with more trade missions and promotions for small and medium enterprises (SMEs). 
  • Recommendation 19 (collaboration premium). The introduction of a collaboration premium (up to 20 percent) for expenditure on public research institutions as recommended in the 3F Report. It appears this would only be available to companies accessing the non-refundable R&D tax offset (i.e. those with an aggregated turnover of $20M or more) and it is unclear whether this would be accessible where the company fails the one percent intensity threshold.

These and the other recommendations in the report seek to refocus government support for industry toward more direct funding. However such a move is a double-edged sword:

  • On one hand it gives government greater control over who gets the funds (so it can target additionality on a case by case basis).
  • But it also means less funds for a deliberately open and industry agnostic program such as the R&D Tax Incentive which is designed to let industry and market forces determine where the best commercially viable innovations lie.

If implemented, the impact of the 30 recommendations will be far reaching, and assessing the impact on a given company will require more information and detailed analysis. The Government is yet to respond to the respond to the report, although it’s likely we will see some of these recommendations reflected in the May Budget.

Please contact us should you wish to discuss your current and future innovation plans so we can work with you to navigate the new innovation framework and take advantage of any government support that may be available to you.

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