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Government commitment to stable R&D Tax Incentive desperately needed after retrospective cuts

Today Tax Laws Amendment (Research and Development) Bill 2013 officially passed both houses of Parliament and is now awaiting royal assent.

The bill initially proposed to deny access to the R&D Tax Incentive for  companies with income exceeding $20 billion. Treasury anticipated this measure would provide $1.1 billion in savings over the forward estimates and $350 million in FY15. The initial proposal was anticipated to affect less than 25 corporate groups.

Amendments to the bill were recently approved by the House of Representatives whereby claims under the R&D Tax Incentive will be limitedto $100 million of annual expenditure. The changes will take effect for income years starting on or after 1 July 2014, representing a retrospective cut to the program partway through FY15.

Given the very large expenditure limit, the proposed cap is anticipated to affect very few companies. A summary of Swanson Reed’s position on the passing of Tax Laws Amendment (Research and Development) Bill 2013 is as follows:

• We acknowledge the current budgetary situation and the need to identify targeted savings;
• We prefer the amendment to the Bill (cap on expenditure) over the initial proposal (outright exclusion for very large entities) since a material level of support for R&D Activity of all corporate groups will remain;
• We are concerned that the cap on expenditure may reduce affected companies’ investment in Australian jobs and collaboration with SMEs;
• We are concerned about the retrospective implementation of the change more than halfway through FY15. An introduction date of 1 July 2015 would have been more suitable, allowing affected companies better opportunity to plan their activities and budget their tax positions;
• We are concerned that any reductions to the R&D Tax Incentive may inhibit companies’ confidence to undertake future R&D Activity. This may also reduce Australia’s competitiveness as a destination for investment in R&D;
• We call on the government to urgently pledge a commitment to stable R&D Tax Incentives and related innovation policy;

Further changes are proposed to the R&D Tax Incentive via Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014, which remains before the senate. This Bill seeks to reduce the rate of R&D Tax Offsets by 1.5% to correlate with the proposed reduction in corporate tax rate.

Swanson Reed understands the principles of this bill and the intention to maintain the relative benefit of the R&D Tax Incentive. However, there is a ludicrous timing mismatch within the 2014 Bill, whereby the R&D Tax Offset rate reduces one year prior to the proposed reduction in the corporate tax rate. Swanson Reed has strongly lobbied the government to amend the 2014 Bill such that the timing and occurrence of any reduction in R&D Tax Offset aligns precisely with a reduction in the corporate tax rate.

Swanson Reed urges all sides of politics to pledge their commitment to the long term stability of the R&D Tax Incentive, particularly for SMEs who are most responsive and reliant on the support. This must be an important focus within the forthcoming tax whitepaper and review of Australia’s Innovation system.