The Morrison Government’s reintroduced R&D tax incentive reforms have copped a hiding from accounting consultants and business lobbyists, who argue the changes will curtail Aussie innovation and punish firms incurring higher costs by keeping tech jobs local.
In the final Parliamentary session of the decade last Thursday, the government moved forward with its second crack at an overhaul of the controversial R&D tax incentive scheme, which will rejoin the refundable offset to the corporate tax rate and introduce an annual $4 million refund cap.
The revised Bill also introduces a second attempt to create a set of tiered premiums for the non-refundable element of the scheme, replacing the current flat-rate calculation with an “incremental intensity” measure based on R&D expenditure as a percentage of total business expenses.
The reforms — inspired by a 2016 review and originally unveiled in the 2018 budget — have been designed to “re-target” the program amid claims it has turned into a rort.
Commonwealth coffers will save an estimated $1.8 billion through to 2022-23 under the proposed changes, which by definition is money that will no longer subsidise private-sector research.
Those with skin in the game are mobilising against the reforms heading into 2020, decrying the changes as anti-innovation, which is a line of criticism the Morrison Government is not unfamiliar with.
Critics, including experts at accounting consultancies Deloitte and BDO, and startup lobbyists, argue the R&D intensity calculation disadvantaged businesses with larger cost bases, such as those with onshore operations.
In February, the bipartisan Senate Economics Legislation Committee refused to sign off on a previous version of the reforms, which included the intensity measures, after a heated public consultation and recommended the government go back to the drawing board.
The new legislation, however, retains the total expense calculation from the old Bill, leading accounting consultancies to claim Treasurer Josh Frydenberg has ignored the committee’s advice.
Nicola Purser, a R&D tax partner at BDO, delivered a particularly scathing assessment of the reforms, saying it’s “astounding” the slightly modified intensity measure remains on the table.
“It seems that very little thinking has been done,” Purser said in a statement on Monday.
“In an environment where the government has publicly recognised that Australia’s business spend on R&D is falling, it seems ludicrous that it would seek to implement measures to dis-incentivise companies to undertake R&D in Australia.”
Deloitte experts also had a dim assessment of the changes, saying “scant attention” had been paid to the Senate recommendation in a note to clients circulated late last week.
“The complete lack of government amendments in response to the bipartisan Senate Committee’s recommendations is extremely discouraging, especially for industries with lower levels of R&D intensity,” Deloitte experts said.
Deloitte said the current intensity measures, which apply to non-refundable claims, would deliver a net tax benefit “markedly below” the original 10% available to companies under the old scheme, noting an intensity of over 20% would be required to clear that hurdle.
“The reduced benefits will result in companies opting out of the Australian R&D regime and potentially shifting operations offshore — New Zealand, for example, has recently introduced a 15 per cent R&D tax credit,” Deloitte’s note said.
The refundable aspect of the R&D incentive for firms with less than $20 million in annual turnover is also being recoupled to the corporate tax rate under the reforms.
Deloitte explained this will mean the rate of the refundable tax offset will decrease to 38.5% by 2021-22, replacing the current 43.5% flat rate.
“These changes to the rate of the refundable offset mean that eligible companies will no longer see incremental increases in the net after-tax benefit arising from falling base rate entity tax rates,” Deloitte said.
Both BDO and Deloitte sell R&D related tax advice to businesses, which means they have a financial incentive in a widely used and effective R&D tax offset system.
Fintech lobbyist Rebecca Schot-Guppy said the “screws are tightening” on startups relying on the R&D tax incentive to support early-stage operations.
“This policy really gets to the heart of Australia’s ability to compete with other nations,” the FinTech Australia general manager said in a statement.
“Getting it wrong risks seeing our fintechs — and the jobs they create — head offshore.”
The February Senate committee report also called on the Morrison Government to assess the impact of its new $4 million R&D refund cap on businesses that have already made investments, but this element of the reform is unchanged in the most recent Bill.
There is, however, a revised start date, meaning the reforms, should they pass Parliament early next year, will apply for income years commencing after July 1, 2019.
The criticisms have done little to dampen Frydenberg’s enthusiasm for the changes, which he outlined last Thursday, when he argued the measures will “better target” the incentive.
“We are committed to backing R&D investment and the economic opportunities and jobs it generates,” he said.
“At the same time, we need to make sure that taxpayers’ money is well targeted by encouraging companies to invest a higher proportion of business expenditure on R&D.”
But with the plight to pass the reforms about to head into its third year, the Treasurer is facing a hostile industry response and floundering confidence in the administration of the scheme by the tax office.
The R&D tax incentive reforms were inspired by a 2016 review undertaken by Australia’s chief scientist, Alan Finkel. It found the program was falling short of its “stated objectives” and recommended an overhaul.
Prime Minister Scott Morrison, then Treasurer, publicly declared Australian taxpayers had been “taken for a ride” by some opportunistic companies.
The government based its current tranche of reforms on the Finkel review, introducing a Bill in 2018, which was curiously titled “making sure multinationals pay their fair share of tax in Australia and other measures”.
By this stage the tax office had been warning software companies about misusing the scheme for some time, even successfully prosecuting a tax agent in 2017 for their role in making fraudulent claims.
Things escalated in late 2018 when the Australian Financial Review published a story revealing high profile startups, including Airtasker, were being sent clawback notices for millions of dollars in R&D incentives.
This poured even more fuel on the fire as angry startups and lobbyists participated in a hotly contested Senate Committee consultation process in February 2019, which was examining the government’s 2018 proposed reforms.
The bipartisan committee refused to sign off on the legislation and called for the Morrison Government to make amendments to address industry concern.
However, by April, with the election imminent, the 45th Parliament expired and the original Bill lapsed.
In August, tax commissioner Chris Jordan spoke about the R&D incentive at a Council of Small Business Organisations Australia event in Melbourne, in the face of criticism from Small Business Ombudsman Kate Carnell over the administration of the program.
Jordan said the scheme had been a “problematic area” for a number of years and took aim at advisors who make money selling grant application packages to startups.
Carnell launched an investigation into the administration of the R&D tax incentive, which is due to report before the end of the year.
We’ll bring you the latest on that assessment when it becomes available.
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