Research and development tax incentives on the agenda

By Zilla Efrat

The importance of a culture of innovation is by no means a new notion and, in many ways, companies around the world have demonstrated their capacity to innovate themselves through a crisis.

Although Australia is not without innovators, the statistics – as highlighted in CPA Australia’s recent submission to the inquiry conducted by the Senate Economics Legislation Committee – appear to tell a tale of reluctance to invest in the R&D that is vital to innovation. Out of one million corporate taxpayers, 1297 companies utilised A$2.7 billion in nonrefundable R&D tax offsets, and 10,638 companies claimed A$2.5 billion in refundable tax offsets in 2016-2017, suggesting that R&D activities are undertaken by few Australian businesses.

According to CPA Australia’s submission, “the data indicates that the government has some way to go to encourage business innovation, and that policy changes should focus on improving access to and enhancing the benefits of undertaking R&D in Australia”.

Leigh Conlan CPA, principal consultant at Specialist Accounting Services, agrees. “Anecdotal evidence from our clients suggests that many don’t see the point of making an application because of all the uncertainty around this,” he says.

Conlan explains that applications for incentives are based on a self-assessment system, and that “the authorities are making it harder for people to self-assess.

“Clients don’t know where they are, particularly in the IT space. What was an acceptable application five years ago is no longer acceptable now.”

Conlan says authorities have been raising the bar because of previous abuse of the incentives. “You will always get that with a self-assessment process, but that’s a policing issue. You don’t cut funds off because of crooks in the system,” he says.

The end result of all the uncertainty and lower funding, according to Conlan, is that “it seems that the attraction to conduct R&D in Australia has declined. “With applications for the scheme getting tougher to make, companies will just go offshore for R&D, particularly IT companies, because there are other countries with the skills needed.

“Companies will go to Singapore, Bulgaria or other countries where it’s cheap to do R&D, and that also offer incentives.”

Exodus to greener pastures

Aaron Ng CPA, senior manager R&D tax at RSM Australia, says that to date, the government hasn’t considered the increasing mobility of global R&D or that Australia’s base of business-as-usual R&D could easily cease, decrease or move offshore.

He says several of his R&D clients across different industries have moved offshore because of more favourable R&D policies and additional government support.

Ng believes Australia is being “outcompeted” in commercialising science, technology, engineering and mathematics (STEM) by countries with better STEM strategies and business-friendly tax systems that include both generous tax incentives and grants.

That said he believes the refundable nature of R&D’s tax offset in Australia for companies with an aggregate turnover of less than A$20 million counterbalances the country’s cost disadvantages, which include wages that are 30 per cent higher in Australia than in the US, for example.

 

“We have also been informed by senior personnel from large organisations that significant R&D work would be shifted offshore if Australia did not retain its R&D tax incentive program.” 

 

Ng says the R&D incentive unquestionably generates additional R&D expenditure by many small and medium sized enterprises and start-ups that would not otherwise occur in Australia.

“Yet, we strongly believe that many of these would move their R&D activities or entire operations overseas if the R&D tax incentive was to be removed or significantly degraded.

“We have also been informed by senior personnel from large organisations that significant R&D work would be shifted offshore if Australia did not retain its R&D tax incentive program.

“Australia is in a much worse position to be the beneficiary of commercialisation of new technology in this country if the R&D activity is not conducted here.

“Given the generally higher costs of commercialising in Australia, if the R&D operations of a company have moved offshore, then there is much less chance of commercialisation occurring here.

“It should be noted that the current tax system incentivises companies to undertake R&D here, but foreign patent box regimes then encourage the commercialisation to be conducted offshore.”

R&D "reforms" in limbo

Not much has happened to improve Australia’s R&D incentives since new proposals, largely based on a 2016 review, were announced in the May 2018 Federal Budget. The Senate Economics Legislation Committee made several recommendations to amend a bill that was introduced into parliament in September 2018, but that bill lapsed when the 2019 federal election was announced.

In December 2019, the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 was introduced into parliament, and another senate committee inquiry was called. The committee’s proposed public hearings, however, have been postponed because of COVID-19.

In its submission to the latest Senate inquiry, CPA Australia notes that the provisions in the 2019 bill remain largely unchanged from their previous incarnation. It also points out a range of drawbacks to the scheme as it is currently proposed.

CPA Australia says the profession put a huge effort into its submissions to the first inquiry, and suggests that the views expressed in these submissions be revisited during the new inquiry. It has also asked the Australian Government to delay the bill, but would prefer the bill not to proceed at all.

R&D incentives worldwide

In its submission, CPA Australia notes that, over time, members of the Organisation for Economic Co-operation and Development (OECD) have been steadily increasing the average tax subsidy they provide as a percentage of GDP. In contrast, despite the large tax subsidy increase in 2012 following the introduction of the current R&D tax incentives (R&DTI) policy, Australia’s tax relief as a percentage of GDP has fallen to below the OECD average. Many jurisdictions now offer highly competitive R&D alternatives to Australia.

New Zealand recently modified its R&D tax credit regime to allow for refundability of tax credit, starting from the 2020-21 financial year.

“New Zealand’s new R&D program of 15 per cent is immediately ahead of the current Australian program for almost all companies,” CPA Australia says in its submission.

“Many large businesses will receive almost four times the benefit if the intensity threshold is introduced in Australia. New Zealand may exceed Australia in terms of tax support for business R&D as a percentage of GDP from 2020-2021.”

Singapore is another jurisdiction with a favourable R&D tax policy.

Tan Ching Ne, a corporate tax partner at PwC Singapore, says Singapore’s R&D tax regime was introduced in 1980, but amendments have been made to its provisions over the years. The current tax provisions allow for 250 per cent tax deductions on prescribed R&D expenditure on qualifying projects undertaken until taxpayers’ financial year ending 2024.

“Singapore’s R&D policies go beyond tax deductions,” Tan says. “Its success has been due to a combination of technology grant programs to companies, collaboration with research institutions and tax deductions.

“A multi-pronged approach involving private sector companies, public sector institutions, institutes of higher learning and government bodies has shaped Singapore’s R&D policies.”

The way forward

In its submission to the Senate inquiry, CPA Australia says research on the effectiveness of R&D tax incentives in other jurisdictions generally demonstrates positive effects from government R&D policies.

It points to a February 2020 report by Innovation and Science Australia, which notes that large and small firms that invest in innovation outperform firms that don’t.

“Due to the global mobility of R&D activities, R&DTI policy adjustments may make Australia uncompetitive internationally and lead to increased outsourcing and offshoring,” says CPA Australia.

These policy adjustments may also reduce economic opportunities, and could compromise government policies to enhance employment opportunities for STEM graduates and develop a knowledge intensive workforce, it adds.