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Musings on business innovation and the Federal Budget

Musings on business innovation and the Federal Budget

Alan Garcia reflects on the Federal Budget's proposed reductions to the R&D Tax Incentive.

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Partner, R&D

KPMG Australia

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After three plus years of review, it came as no surprise that the Federal Budget proposed reductions to the Research and Development (R&D) Tax Incentive, Indeed, if the measures are passed unamended, the large majority of current R&D tax claimants will receive less funding.

The proposed measures are:

  • The R&D intensity measure will reduce the net benefit (likely by more than 50 percent) for many existing non-refundables with turnover greater than $20m except for those with an R&D intensity of more than 13 percent. Importantly, due to the blended rates of benefit, if intensity increases from 1 percent to 5 percent, for many companies the average rate of benefit will still be lower than the current 8.5 percent benefit. On the bright side, the budget announcement enables claims of up to $150 million on R&D per year (currently only the first $100 million attracts an additional benefit).
  • For companies with a turnover less than $20 million, the $4 million annual cap was expected but it will not apply to clinical trials. This is a particularly welcome relief for Australia’s globally respected and rapidly growing life sciences industry. Overall, however, smaller companies will receive less funding due to: the proposal to fix the rate of benefit at 13.5 percent as opposed to the current fluctuating benefit of 16 percent; and (for some) as a result of the annual $4 million cap.

Ultimately the Federal Budget is focused on containing the cost of the R&D tax incentive by reducing the tax benefit for most companies and increasing compliance activities. To manage compliance more effectively, we strongly encourage claimants to introduce regular ‘R&D check-ins’ to marry your R&D activities throughout the year to the annual AusIndustry R&D registration. This should link the experimentation and new knowledge gained to the relevant costs incurred on a contemporaneous basis.

Whilst the proposed measures are expected to save more than $2 billion, the Government appears keen to take a more holistic perspective with regard to increasing business expenditure on R&D by reducing company tax rates, strengthening research funding (e.g. $500 million for the Medical Research Future Fund) and improving industry collaboration. The Government hopes that these broader measures will additionally support Australia's economic growth through innovation.

We expect draft R&D legislation to be released for consultation over the next month.

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