by KIRSTY ABBOTT
The Research and Development (R & D) Tax Incentive was designed to be a way in which to stimulate industry investment in R & D. Its aim was to help Australian companies innovate and grow by offsetting some of the costs of eligible research and development. Ten years on, the federal Government is still singing its praises. A summary of the companies that have been “helped” by the R&D TI can be found here.
However, since its introduction, the R & D tax incentive has been subjected to ongoing instability from proposed and actual changes in legislation and administration. In 2016, improvements were suggested by Bill Ferris, Alan Finkel and John Fraser (see umpteen CMM stories since this time). This 2016 review (known as the 3F’s Review) concluded that the incentive was good, but not great. In short, the review found that the R&D TI did not fully meet is stated policy objectives and needed to be better targeted.
Following this review, plans were announced in 2018 to increase the threshold to qualifying and cap cash payments to “reward additional investment in R & D whilst also ensuring the integrity and fiscal affordability of the R&DTI”. Controversially, part of this plan was to impose an annual cap on R&D tax offset refunds of $4 million with any remaining offset amounts being treated as non-refundable carry forward tax offsets. These reforms stalled in the Senate. The government had another go in 2019, but these reforms also went nowhere.
Third time lucky. Considerable changes to the tax incentive scheme were introduced by the government in 2020. Notably, the proposed $4 million cap on refunds was abandoned, as were plans to cut $1.8 billion from the scheme. Instead, the scheme was given a boost in the 2020 Federal Budget in which the government committed $2 billion to the scheme. Additionally, the overall cap for eligible R&D expenditure will be increased from $100 million to $150 million. These reforms apply to income years beginning on or after 1 July 2021, although some administrative elements of the reform applied from 1 January 2021.
Despite these reforms, problems with the scheme remain.
Firstly, the system remains administratively clunky. The R&DTI is jointly administered by the ATO and Industry Innovation and Science Australia. A company must register the R & D activities with Industry Innovation and Science Australia before the tax offset is claimed, and the ATO will determine if the expenditure claimed in a tax return for R&D activities is eligible for the tax offset. This has led to inconsistencies in understandings and interpretations between the two agencies. This lack of certainty can be particularly challenging for small businesses.
Secondly, like most of the Australian tax system, the R&DTI operates on a self-assessment basis. This has allowed millions of dollars to be rorted from the government.
Finally, there have been calls for the R&DTI to be expanded to include a premium rate for businesses that collaborate with publicly-funded research organisations, including universities. However, this proposal does not appear to be on the horizon of reform.
Ms Kirsty Abbott is a Taxation Law Lecturer at CQUniversity School of Business and Law. Her research includes consideration of the automation of decision-making processes by the public sector.