Swanson Reed Thoughts on Media Article Calling for Overhaul of R&D Tax Incentive

• Australian business is falling behind international peers in R&D performance;
• The R&D tax incentive is counter-intuitive to innovation, because it fails to focus work into Australia’s areas of comparative strength and provides support only after the work is completed;
• The R&D tax incentive should perhaps be the focus of another review;
• The R&D tax incentive should perhaps be refocused on defined areas of national interest and awarded ahead of R&D rather than as a tax subsidy.

• The article seems to have joined calls from other circles to overhaul the R&D Incentive from a broad based, market driven incentive (available to all eligible entities) to a more grant based scheme (available to those chosen by the government). The R&D Tax Incentive has become ingrained as a critical source of funding for small business who are conducting R&D Activity. Whilst the programme’s current self assessment system is not perfect, to remove this and replace it with the uncertainty of companies seeking access to the programme being at the mercy of a Government assessment/merit process would present significant uncertainty and challenges to business. In addition, the Government has come under some criticism lately for the speed at which the National Reconstruction Fund (‘NRF’) funding has been rolled out (not from us, since we’d rather the NRF money be spent efficiently than rushed and in an inflationary manner). However, if this same slow speed of dispersing funds were to apply to funding rediverted from cash poor startup’s Refundable R&D Tax Offsets, it would be a disaster as:
  • The lag or uncertainty in funding may doom many companies that are recipients of a R&D Tax Offset;
  •  If a process of bureaucracy, such as applying for a grant was required to be gone through (taking months or years) before funding was known and R&D activity could commence, it would drastically slow down the agility of business R&D to be responsive to Australia’s current or emerging challenges;
• There seems to be growing calls from Academia to overhaul the R&D Tax Incentive, and divert funds to universities. There can perhaps be some middle ground leveraging past reviews:

• • The Finkel, Ferris and Fraser review called for the installation of a ‘collaboration premium’, where companies spending money on R&D receive a higher rate of recoupment. This was again called for in last year’s BCA report. The BCA report also supported the maintenance of a strong R&D Incentive;
  • The innovation that arises out of (1) Australian small and micro businesses is vastly different to that which arise from (2) a university/academic institution OR from a larger business that may have the resources and connections to attain a directly funded grant. Both types of R&D are required within the Australian eco-system;
• Overhauling the system risks substantially reducing R&D in the short term, particularly by smaller entities. This harms the government’s prime economic objectives of increasing productivity and having spillovers into lower inflation;
• Ed Husic was quoted in April 2023 as stating ‘improved measures to incentivise R&D spending are under consideration for the May budget, but that no changes to existing tax incentives are planned, and that nothing will happen without industry consultation’. We would be shocked if industry consultation concludes that a grant system should replace a stable incentive that was enshrine in the tax law;
• Following the significant legislative amendments to the R&D Tax Incentive passed by both parties in October 2020 (with Bipartisan Support), Australia’s R&D Tax Incentive has only recently emerged from a turbulent decade. Industry has widely applauded the 2020 changes as providing stability to the programme that has been craved after a period of ongoing instability where the programme was subject to actual and proposed changes. To take this stability away would be a terrible mistake, as over the past 12 years of the R&D Tax Incentive:
  • There has already been a number of reviews into the programme (Finkel/Ferris/Fraser review, Board of Taxation Review and reviews by Small Business Ombudsman);
  • There has already been significant changes (cap on expenditures, change to rates, change to intensity thresholds and clawback);
  • There are a number of academic articles which conclude that R&D Tax Incentives work best when they are stable.

In addition, we wish to note that if we were in an alternate world to the current scenario, where R&D expenditure in Australia was growing largely, and uptake of the R&D Tax Incentive was exploding, there would also be calls for cutting/capping/changing the R&D Tax Incentive. So to an extent, the programme can’t win either way…..

Whilst the current programme is not perfect, we believe the benefits of stability outweigh further uncertainty hanging over the programme.