News & Analysis

Review of R&D Tax Incentive calls for $2 million cap on cash refund for startups and smaller businesses

- September 29, 2016 3 MIN READ
tax incentive

A review of the R&D Tax Incentive has recommended the Government cap the cash refund available to startups and small to medium enterprises through the R&D Tax Incentive at $2 million annually, while doubling the expenditure claim threshold of large corporates to $200 million.

The review was conducted by Australia’s chief scientist Alan Finkel, Innovation Australia chairman Bill Ferris, and Secretary to the Treasury John Fraser, who were tasked with identifying opportunities “to improve the effectiveness and integrity of the R&D Tax Incentive, including by sharpening its focus on encouraging additional R&D spending.”

The panel presented its six key recommendations to Government in April. Minister for Innovation Greg Hunt released the recommendations yesterday, welcoming public submissions on the review until the end of October.

“Innovation is crucial for both established and new businesses. It’s not just about tech startups or IT; it’s also about established businesses doing things better to be more productive and stay competitive,” he said.

“The Turnbull Government is committed to pursuing innovation, and the economic opportunities and jobs it will generate. That’s why it’s important to ensure the government’s significant investment in R&D is generating maximum benefit for the economy and the Australian public,” Hunt said.

The panel recommended that recipients of the non-refundable components of the R&D tax incentive, businesses with an annual turnover of over $20 million, be able to double their expenditure claims on R&D from $100 million to $200 million if they reach an intensity threshold; that is, if R&D expenditure makes up a certain amount of their total budget. The panel recommended this be set at one to two percent.

Under its current set up, the report stated that “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 recommendation of most importance to startups however is that suggesting the capping of the annual cash refund payable at $2 million for eligible companies, those with a turnover of less than $20 million. The panel recommends the remaining offsets be treated as a non-refundable tax offset carried forward to use against future taxable income.

With the R&D Tax Incentive costing the Government $3 billion in 2013/14, the panel wrote in its report that while the scheme provides important cashflow assistance to smaller companies, “the considerable growth in the cost of the refundable component is, however, impacting the programme’s long-term sustainability”.

A number of figures across the startup landscape have expressed disappointment at the recommendations, with StartupAUS CEO Alex McAuley welcoming “elements” of the review but calling for a greater focus on the “pointy end of the program, where dollars spent on startups translate directly into jobs produced and additional R&D being conducted”.

Bane Hunter, executive chairman of Australia-founded, New York-based logistics startup GetSwift and former president of global growth and strategy for BlueChilli, said that as the global competition to attract R&D continues to heat up, anything that restricts Australia’s ability to compete can become problematic.

“When it comes to tax credits, it’s critical to realise that startups and small companies are much more dependent on R&D credits when it comes to job growth and creation,” Hunter said.

“For us, one of the deciding factors to keep all our technical staff in Australia was the R&D tax credit – it would not be helpful if scaling our operations and an increased domestic spend is curtailed as a result of an inappropriate R&D tax structure.”

After an election campaign during which the idea of startups and innovation failed to take root in the mainstream, the shift to ensuring larger businesses are part of the conversation was initiated by Hunt last month, as he discussed the creation of a new federal fund to help spur innovation in businesses worth between $20 million and $200 million.

Hunt told the audience gathered at the AFR’s Innovation Summit in August that, rather than an ideas boom focused solely on startups, innovation is “about both old and new businesses”.

“In essence the Industry, Innovation and Science portfolio is about job security and job creation. By that I mean industry is about the jobs of today, innovation is about the jobs of tomorrow and science is about the jobs of the future,” he said.

The review of the R&D Tax Incentive has also recommended a “collaboration premium” of up to 20 percent be awarded to businesses that collaborate with universities and other publicly-funded research organisations. This premium would also apply to the cost of employing new STEM PhD graduates in their first three years of employment.

Also recommended was easing the administrative burden for those applying for the R&D Tax Incentive through changes such as adopting a single application process. It has also called for greater transparency by publishing the names of companies claiming and the amounts claimed, and greater clarity around the definitions of eligible activities.

Submissions are open until October 28, with the Government to also conduct roundtables around Australia.

Image: Greg Hunt. Source: abc.net.au