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R&D Tax Incentive Reform Still On Government Agenda, Despite Focus On Enhancing Local Manufacturing

May 22nd, 2020

Industry Minister Karen Andrews addressed the National Press Club during the week to outline Government plans for industry policy in the wake of the COVID-19 situation.

Points from the speech include the following:

• Ms Andrews said the Coronavirus pandemic had exposed gaps in Australia’s manufacturing capacity, and there would be “significant changes” once the crisis abated;
• The government would look to build on its “comparative strengths” in mining and agriculture and find ways to “value-add” on raw materials previously marked for export;
• Battery manufacturing and food processing may be areas of focus;
• The government would also look at reducing red tape, using its purchasing power to buy local, and reducing the cost of energy for manufacturers;
• Ms Andrews dismissed questions about ditching proposed reform to the R&D Tax incentive scheme, and signaled that the Morrison government will not back down on planned cuts.

Media coverage of Ms Andrew’s speech during the week included quotes from Labor senator Kim Carr and Industry bodies who were highly critical of the government’s proposed R&D Tax Reforms.

The government had reintroduced a bill to reform the R&D Tax incentive in December 2019, despite:

• A Senate Economics inquiry concluding that a previous iteration of the bill should be withdrawn due to concerns over complexity, particularly the controversial intensity threshold;
• Widespread condemnation from industry, with a consensus that the intensity threshold would punish local manufacturers and risk driving R&D offshore.

The reintroduced R&D Tax Incentive bill was proposed to apply for FY20, however as it has not yet passed as law, it would appear very unlikely to be passed on time to apply for FY20 R&D claims.

Swanson Reed acknowledge that the government have provided generous support to business throughout the COVID-19 situation, however their reluctance to withdraw proposed budget cuts to the R&D Tax Incentive is puzzling considering:

• The proposed intensity threshold would punish companies with high cost bases, particularly Australian manufacturers, who the government has stated it intends to greater support;
• The savings potentially yielded from the changes are negligible relative to the budgetary impact of new stimulus measures introduced in recent months;
• The proposed changes, and their subsequent application and interpretation, would impose upon companies significant uncertainty at a time when:
  • Australian businesses’ R&D investment was already in decline pre-COVID-19;
  • Australian businesses face significant headwinds post-COVID-19;

We call on the government to reconsider their position and withdraw their proposed R&D Tax Incentive reforms.