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Productivity Commission Review of Industry Assistance and Upcoming Federal Budget

The Productivity Commission is the Australian Government’s independent research and advisory body on a range of economic, social and environmental issues affecting the welfare of Australians. It states its role is to help governments make better policies, in the long term interest of the Australian community.

In early August 2022, The Productivity Commission published its annual review of trade and assistance which it notes is to keep a record of assistance.

Some notable extracts from The Productivity Commission annual review relevant to the R&D Tax Incentive include the following:

• The Trade and Assistance Review aims to provide a transparent and consistent estimate of the value of budgetary assistance and who benefits — which is essential for any discussions about the benefits and costs of particular programs or measures. Budgetary outlays and tax concessions are included in the Commission’s assistance estimates when they provide a pecuniary benefit to some businesses and not others (box 1.2);
• The Commission’s estimates of budgetary assistance are divided into two categories.

o   Budgetary outlays — program funding provided by the Australian Government that assists businesses. Budgetary outlays most commonly take the form of grants, subsidies, loans, guarantees or funding for organisations to perform commercially beneficial services.

o   Tax concessions — assistance by way of differential tax treatment that provides benefits to some businesses but not others.

• Where possible, the Commission allocates budgetary assistance to the industry that benefits from it. This is undertaken on an ‘initial benefiting industry’ basis — that is, assistance is allocated to the industry that ‘hosts’ the business(es) that initially benefits from a program or measure. For some measures, such as assistance provided through rural R&D corporations and the R&D Tax Incentive, the Commission typically uses the industry allocation provided by the department or agency that oversees these measures;
• The majority of budgetary assistance in 2020-21 was directed to small businesses ($5.2 billion) and R&D ($4.5 billion). However, the largest increase was in industry-specific assistance, which rose from $1.7 billion in 2019-20 to $3.6 billion in 2020-21.
• The supporting tables for ‘Australian Government budgetary assistance by program, ranked by expenditure’ note that:

o   R&D Tax Incentive Refundable Offset Cost increased from $1,868M in FY20 to $2,119M in FY21;

o   R&D Tax Incentive Non-Refundable Offset Cost remained steady at $570M from FY20 to FY21.

The AFR has reported that the Productivity Commission report could be used by incoming Treasurer Jim Chalmers and Finance Minister Katy Gallagher in identifying “waste and rorts” in the budget ahead of the new Government’s budget to be handed down in coming months. It has previously been reported in the media that concessions such as diesel fuel rebates may be a budget savings target.

We believe that it is not likely that the incoming government may target the R&D Tax Incentive for budget savings, particularly for small business, since:

• The Labor Government supported the legislative changes to the R&D Tax Incentive made only recently, in October 2020. The previous government stated the amendments were key for Australia’s economic recovery from COVID. The October 2020 amendments were widely welcomed by industry after the previous government backed away from earlier proposed cuts to the programme which presented significant uncertainty;
• Before the election, new Industry Minister Ed Husic indicated he would look at making the R&D Tax Incentive program more friendly to software-based start-ups;
• When in opposition, the Labor party indicated that they would seek to “preserve” the R&D Tax Incentive;
• The Labor Government has key policies regarding local manufacturing, tech sector jobs and clean energy which are indirectly supported by companies conducting R&D activity.

It is, however, not inconceivable that changes may eventually be proposed to the R&D Tax Incentive for larger companies, since “Ensuring Multinationals Pay Their Fair Share of Tax” was also a key policy objective of the newly elected federal government. When Labor was last in power, the Gillard Government proposed reductions to the R&D Tax Incentive for large companies by caps and offset changes. If the R&D Tax Incentive were to be reduced for large companies, such a move would be regrettable, since larger companies’ capital is more mobile and they are able to choose to conduct projects in jurisdictions that offer better or stable R&D Tax Incentives.

We call on the new government to maintain and commit to stability in the R&D Tax Incentive, which would increase the programme’s effectiveness and give companies confidence to make long term investment decisions.

Check out our website for more information regarding the R&D Tax Incentive, or get in touch with our office if you would like to speak to someone about a potential  R&D claim.