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Tax Incentives Vs a Grant-Based System –  Which is best for stimulating R&D in Australia?

When it comes to policies bridging the gap between the ‘laboratory’ and the marketplace, companies will typically look to either grant funding or tax incentives. Previously, we’ve delved into the differences between government grants and the Research and Development (R&D) tax incentive in Australia. However, where support for R&D is called for, an important question remains: should reliance by placed on cash support (grants), or on the tax system as a mechanism to deliver credits or allowances (or a combination of these)?

The experience of OECD countries is mixed, reflecting a diversity of views and country situations, with choice over the delivery mechanism ultimately depending on the country. Historically, public R&D grants were the only viable source of seed capital in Europe during most of the 1980s and early 1990s – a period during which high-tech, high-growth companies were very scarce. However, presently, more countries are now using tax incentives than a decade ago and the schemes are more generous than ever. As of 2010, more than 20 OECD governments provided fiscal incentives to sustain business R&D, up from 12 in 1995 and 18 in 2004.

In relation to this, the main argument for relying on the tax system is that tax relief tends to be delivered on a less discretionary basis, compared with grants, once the qualifying criteria are decided. As it currently stands, Australia has a competitive R&D tax incentive program on a global scale, and has one of the best refundable R&D tax offsets and  cash back schemes internationally. Thus, Swanson Reed is of the view that a move to a grant-based programme would drastically reduce the effectiveness and attractiveness of the scheme. In particular, because:

• A grant-based system would reduce the additionality impacts of the R&D Incentive, since companies are less likely to invest in R&D Activities if their receipt of support was competitive rather than entitlement based.
• A grant-based system would likely reduce the instance of start-up ventures and slow their progress. The process for assessing grant applications can often be time consuming and would not likely fulfil a start –up’s needs for certain, robust capital.
• A grant-based system would reduce the ability of the R&D Tax Incentive to attract international investment. Government grants understandably favour Australian companies and the process of grant application would be daunting to overseas companies.
• A grant-based system would likely require a larger staffing by AusIndustry to thoroughly assess applications before release of funds.
• A grant-based system would make the R&D Tax Incentive much harder for participants to access.

Typically, grants can be directed to specific projects that the government/innovation agencies consider having high social returns and are more dependent on discretionary decisions by governments. Whereas, a tax-based subsidy seems the market-oriented response as it leaves the choice of how to conduct and pursue R&D programs in the hands of the private sector.

Overall, in order to stimulate innovation in Australia, Swanson Reed believes the R&D Tax Incentive should remain a broad-based programme administered through the tax system. As noted above, a move to a grant based, competitive system would ultimately radically reduce the efficiency and desirability of the programme.

If you would like to learn more the R&D tax incentive, get in touch with us today by contacting one of our offices.