The amount companies can spend on research and development and receive a tax offset should be doubled to $200 million, a review of the $3 billion R&D tax incentive program has recommended. The R&D tax incentive cost the federal government $3 billion in 2013/14, and a review was ordered on concerns it could be better targeted to jobs growth, especially for PhD graduates in science, technology, engineering and mathematics subjects. The government has already legislated a cut in the rate of the R&D tax offset, from 45 per cent to 43.5 per cent for companies with turnover less than $20 million, and from 40 per cent to 38.5 per cent for other companies, as part of broader budget savings measures.
Undertaken by chairman of Innovation Australia Bill Ferris, Australia’s Chief Scientist Alan Finkel and Secretary to the Treasury John Fraser, the R&D tax incentive review was delivered to the Turnbull government in April and released on Wednesday by Innovation Minister Greg Hunt, who promised consultation on its recommendations until the end of October. The review’s report found the $100 million annual cap on tax-offsetting R&D tax expenditure was a handbrake on innovation. “The expenditure threshold has effectively locked-in a maximum annual $10 million tax benefit to around 25 large and very large companies that undertake more than $100 million in R&D, removing their incentive to undertake additional R&D in Australia,” the report said. However the cap should only be lifted to $200 million if accompanied by an “intensity threshold” whereby R&D must exceed “1 to 2 per cent” of business expenses to qualify for the R&D tax offset. “Such a level of expenditure would be expected as business as usual in a truly innovative company,” the report said.
A “collaboration premium” of up to 20 per cent has also been recommended, to reward businesses that commercialise ideas in partnership with publicly-funded research organisations, such as universities. Already flagged as a priority by report co-author Mr Ferris, the report said the premium would help lift Australia’s low employment levels for PhD graduates in STEM subjects – it recommends the offset apply to the cost of hiring them – and exploit the “lost opportunity for greaters spillovers of knowledge between larger companies, publicly-funded research organisations and the broader marketplace”. Elsewhere, the review recommended a $2 million annual cap on the refundable tax offset component of the incentive, which is available to companies with turnover under $20 million. This was consistent with recommendations that took an “old school view” said the CEO of peak startup body StartupAUS, Alex McCauley. “These are recommendations which retain the status quo for big corporates and focus on research, of which Australia already has plenty, rather than development and commercialisation,” McCauley said.
The review recommended the R&D tax incentive have a single point of application, and be administered by just one body instead of by both AusIndustry and the Australian Tax Office as it is today. It also called for tighter definitions around the activities eligible for the incentive, saying they lacked clarity and consistency. “This opens the way for the R&D consultant and tax agent industries to charge significant fees to guide potential recipients through the uncertainty…the compliance costs for companies registering in the programme are relatively high as a percentage of the benefit,” the report stated.