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Does the R&D Tax Incentive Need Changing?

In launching the National Innovation and Science Agenda last year, the Australian Government announced that they would be undertaking a review of the Research and Development (R&D) Tax Incentive programme to make it better accessible to the business sector. At present, the review is currently underway and it is expected to report to Government in April 2016. Proposing the question, does Australia’s R&D Tax Incentive need changing?

The Current Performance

In its current form, Australia has a competitive R&D tax incentive program on a global scale, and has one ofthe best refundable R&D tax offsets  and cash back schemes internationally. Chief scientist Alan Finkel, one of three top-level officials who is reviewing the R&D tax incentive, recently weighed in on the current scheme. In particular, he notes, “we’ve seen good evidence where it’s very effective, especially in very small companies that spend 50 or 60 per cent of their turnover on R&D.” Dr Finkel further described that Australia’s R&D tax regime was generous by international standards. “So other countries, and America is a particular example of this, [use] competitive grants schemes and direct contacts to send more to support business R&D than they do through tax foregone,” he said.

As per our Tax Incentives Vs a Grant-Based System post, Swanson Reed believes the R&D Tax Incentive should remain a broad-based programme administered through the tax system. Based on the feedback from clients and stakeholders, Swanson Reed concurs that the current R&D Tax Incentive provides a high level of encouragement for companies to engage in R&D, particularly SMEs.  Moreover, evidence from the OECD appears to coincide with Dr Finkle’s comments and Swanson Reed’s own findings, particularly when pertaining to the R&D tax incentive and small companies. In specific, the OECD notes, ““the available evidence shows that R&D tax incentives do increase business expenditure on R&D, with the effects typically being larger in the long run than in the short run. The evidence also suggests that smaller firms seem to be more responsive to the R&D tax incentive than larger firms, typically because these firms are much more credit-constrained.”

The Effect of Change

Undeniably, the programme remains crucial for Australia’s transition to a knowledge based economy. However, in light of the review, a long term commitment to the programme’s stability is the single best way to enhance its effectiveness. The series of changes proposed to the programme may reduce companies’ willingness to invest in R&D activities in the expectation that the legislated entitlement will remain. Any adverse changes may also harm Australia’s reputation as a destination for investment in R&D, as many overseas entities have invested in Australia based on expected future entitlements available under the R&D Tax Incentive.

Likewise, the OECD has also recently warned against R&D tax policy reversals:

“For countries that have experienced a large number of R&D tax policy reversals, the impact of R&D tax credits on private R&D expenditure is greatly diminished. It is therefore important that governments do not repeatedly tinker with such policies to minimise policy uncertainty for firms… The stability of the R&D tax incentive scheme over time also plays an important role. Expectations that R&D incentives are permanent strengthen their impact on R&D investment.”

Indeed, a generous and certain programme will be the key to increase Australia’s innovative capacity through encouraging companies to undertake R&D activities. However, companies need a stable legislative platform to provide them with the confidence to make long-term decisions in anticipation that support will be available.

Ultimately, there may be opportunity to enhance the efficiency of the R&D Tax Incentive; however, any changes must not adversely impact the fundamental structure of the programme, which provides a broad-based, easily accessed and significant Incentive. A bipartisan commitment to the stability of the R&D Tax Incentive would give companies confidence to make long-term investments in R&D and may reduce concern of changes to R&D entitlements across future political and budgetary cycles.

If you would like to discuss the R&D Tax Incentive further, please do not hesitate to contact one of Swanson Reed’s offices today.