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AFR reports that government will back down on R&D Tax budget reforms

In December 2019, the government re-introduced a bill to reform the R&D Tax Incentive.

This bill was a slightly modified version of a previous reform bill (Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018), which did not pass through the Senate at that time. A Senate Economics Legislation Committee recommended in February 2019 that the initial bill should be deferred from consideration until further analysis of the bill’s impact was undertaken, particularly with respect to concerns around the proposed intensity threshold and refundable offset cap.

The R&D Tax Reform bill has been uniformly criticised by companies, industry groups and R&D tax professionals, with concerns particularly directed at the “Intensity Threshold” proposal, which would punish companies with large cost bases, such as local manufacturers.

The criticism of the government then became more aggravated when it was revealed that the government intended to pursue the reform retrospectively: back dated to 1 July 2019.

The AFR has reported today that:

• R&D expenditure by business has declined under the Coalition: between FY16 and FY19, it fell from $17.32 billion to $11.92 billion, a drop of 30 per cent;
• In next week’s budget, the federal government is set to reverse its plans to cut the research and development tax incentive in recognition it will be needed to bolster advanced manufacturing in the wake of the COVID-19 recession;
• Prime Minister Scott Morrison has confirmed a backdown to the proposed R&D cuts, saying “we certainly want to encourage more research and development”;
• It was likely the caps the government has been trying to impose on the amount that businesses could claim would be increased or removed altogether.

It is not clear whether the government will withdraw the reform bill altogether, or whether they will make changes to the proposed reforms, such as tweaking the caps and rates. Detail is likely to be revealed in the budget.

Just as the government was widely criticised for pursuing the R&D Tax budget reforms, they should be commended for seeing reason and shifting position, if the back down on the proposal does indeed come to fruition.

Parties that have lobbied the government on this issue should also be commended.