Home » News » If R&D Tax Law is going to be changed effective 1 July, (as announced in the FY25 MYEFO), how about making these changes too?

If R&D Tax Law is going to be changed effective 1 July, (as announced in the FY25 MYEFO), how about making these changes too?

A surprising announcement was made by The Government in the FY25 MYEFO released in late December 2024, which took the unprecedented step of announcing an eligibility restriction to be applied to specific sectors. The MYEFO budget papers noted:

• The Government will exclude activities related to gambling and tobacco from Research and Development Tax Incentive eligibility for income years starting on or after 1 July 2025. Research and development activities related to gambling can exacerbate addiction and associated harms, while activities related to tobacco can increase health risks. Excluding these activities will ensure that the Government is not subsidising this type of research and development. 
• Activities that are solely for the purpose of harm reduction, such as reducing addiction, will remain eligible to receive support. This measure is estimated to increase receipts by $12.0 million and decrease payments by $8.0 million over five years from 2023–24.

This measure will likely require that The Government propose and enact a change in the tax law, possibly by changing the exclusions in INCOME TAX ASSESSMENT ACT 1997 – SECT 355.25.

As it’s considered best practise for tax law to not be passed retrospectively, any change in law for this measure should occur by 30 June 2025.

This might be wishful thinking, but if the Government is going to the trouble of changing the law, why not include within any bill the following additional changes which would be beneficial to the R&D Tax Incentive and may provide spillover benefits to increase business investment in R&D?

• An increase in the turnover threshold for the Refundable offset:
  • As noted in our previous updates, the $20M turnover threshold was established at the outset of the R&D Tax Incentive program in FY12. Many argue this turnover threshold is now outdated, since when allowing for inflation and growth, the policy definition of a “small business” in FY12 is extremely different to that in FY25;
  • Perhaps the turnover threshold could be extended to $25M, along with provision for future indexing;
• An increase to the R&D Expenditure Cap:
  • The Business Council of Australia and notable large claimants such as Cochlear have recently increased their calls for removal or extension of the $150M annual expenditure cap on claims;
  • Changes to the cap could provide additional incentive for large companies to undertake more R&D;
• Collaboration Premium:
  • A collaboration premium that provides enhanced tax benefit for expenditure with RSP or University organisation was originally proposed in the Ferris, Finkel and Fraser review and may be worth exploring;
• Stability Provisions or undertakings:
  • If changes to the criteria are made, it would be ideal if somehow a bi-partisan consensus could be reached that no further detrimental changes to the R&D Tax Legislation be made in the near term. If not within the law, this could be stated as a policy document to provide business confidence to undertake R&D Activity.

It’s probably unlikely that these proposals are included within the upcoming bill proposing to change the R&D Tax law, since time may not allow for their consideration, and the current R&D Review has only recently gotten underway. However, as the change relating to exclusions for gambling and tobacco was probably moreso for policy than budgetary reasons, perhaps the above proposals should be considered by the government as a means of supporting their objectives of increasing business investment in Australian R&D.

We also think there are several issues that needs to be resolved with the proposal to exclude gambling. As we had noted when the measure was announced:

• Swanson Reed are not advocates for the gaming or tobacco industries and have very limited involvement with companies operating in them. We agree that significant public harm can be done by those exposed to gambling and tobacco.
• However, we are concerned by any measure that reduces the stability of R&D Incentives, and this may lead other industries to wonder if their eligibility may be compromised in future, thereby possibly reducing business confidence to invest in R&D. We also think that R&D Tax Incentives work best when they are broad based, market driven and stable, to allow business to determine where the most effective deployment of scarce R&D Capital should be deployed.
• It is also unclear as to what degree a company conducting R&D Activities related to gambling and tobacco. For example, If a company is developing software used for gambling industries to attain or process data (but is not directly providing a gambling service) are their activities excluded?

Perhaps the Government could draft the exclusion on Gambling to apply only to large companies claiming the non-refundable offset (and this may exclude a couple of very large companies that have been mentioned in the media since the release of the transparency reports). This may allow transition to some smaller companies that may have only an annciliary involvement in the gambling supply chain, but that may be reliant on receipt of the Refundable R&D Tax offset.

Swanson Reed will continue to advocate for stable R&D Incentives that provide businesses with confidence to conduct R&D Activity in Australia.

Please get in touch with our office if you require assistance, would like to speak to someone about a potential claim, or check out our website for more information.