Senate committee asks R&D tax incentive Bill be refined before it’s passed

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The Senate Economics Legislation Committee has asked the federal government go back to the drawing board on a range of measures centred on the research and development (R&D) tax incentive.

In a report [PDF] on the Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018, the committee said it recognises the need for government to maintain public confidence in the integrity and financial sustainability of the R&D tax incentive, but that it is not confident the introduced measures will provide exactly that.

“This confidence promotes business innovation across the economy and allows the scheme to meet its stated objectives of additionality and spillovers,” the committee wrote. “Further, the committee recognises that, while the R&D tax incentive in its current form is falling short of these aims and objectives, there is a need to reform the R&D tax incentive.

“On the weight of evidence presented, the committee considers that the bill should not proceed until there is further consideration of the R&D tax incentive measures.”

This Bill aimed to implement a number of measures announced in the 2018-19 Budget, including reforms to the R&D tax incentive, Australia’s thin capitalisation rules, GST arrangements for offshore sellers of hotel bookings in Australia, tax payable on luxury cars being re-imported into Australia after refurbishment, and the definition of a “significant global entity”.

The R&D tax incentive was introduced in 2011 in its current form. It is the principle mechanism used by the Australian Government to stimulate industry investment in R&D, and does this by providing a tax offset for eligible R&D activities.

Approximately 13,000 companies are registered in the R&D tax incentive scheme.

There are two core components of the R&D tax incentive: A refundable tax offset for certain eligible entities whose aggregated turnover is less than AU$20 million and a non-refundable tax offset for all other eligible entities.

The R&D tax incentive is currently subject to a AU$100 million expenditure threshold but the Bill proposes an increase of the R&D expenditure threshold to AU$150 million.

Specifically, the Bill will: Link the R&D tax offset for refundable R&D tax offset claimants to claimants’ corporate tax rates, in addition to a 13.5 percentage point premium; cap the refundable tax offset at AU$4 million per annum; and change the way in which larger R&D entities calculate their R&D tax offsets to an intensity-based calculation.

On examination of the proposed AU$4 million cap on the refundable tax offset, the committee believes that it would “benefit from some finessing” to ensure that R&D entities that have already made investment commitments are not impeded unintentionally.

The changes to the Bill were scrutinised during its hearings, the committee said, with concerns arising over the laws being applied retrospectively from July 1, 2018.

The committee shared concerns over the potential to disrupt investment in R&D activities that have already been scheduled.

“In particular, the committee considers that some R&D entities affected by the introduction of the AU$4 million cap on the refundable tax offset have not had enough time to plan for the changes proposed in the Bill, given that their investments have been in train for some time prior to the announcement of this measure,” the report says.

“Nevertheless, the committee is also cognisant that governments, in ensuring accountability of taxpayer funds, need to constantly monitor, examine and strengthen such programs and industry as partners in such schemes also need to remain alert to the need for improvements.”

Making one recommendation in total, the committee asks that the Senate defer consideration of the Bill until further examination and analysis of the R&D tax incentive is undertaken.

In particular, the committee recommends that: The approach to the cap on the refundable portion of the R&D tax incentive is refined, noting investment decisions already taken; and the formula for R&D intensity is refined, noting inherent differences in R&D intensity across industries and impacts on businesses with large operating costs.

A review into the R&D tax incentive was announced originally as part of former Prime Minister Malcolm Turnbull’s AU$1.1 billion National Innovation and Science Agenda in December 2015.

The review had found the following September that the program “falls short of meeting its stated objectives of additionality and spillovers”, and made six recommendations to be considered as a package of measures to improve the overall effectiveness and integrity of the program while encouraging additional R&D.

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Senate committee asks R&D tax incentive Bill be refined before it’s passed