Government review calls for better R&D incentives

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The Minister for Industry, Innovation and Science, Greg Hunt, has today released a review undertaken by Chair of Innovation Australia Bill Ferris, Australia’s Chief Scientist Alan Finkel and Secretary to the Treasury John Fraser, to: “Identify opportunities to improve the effectiveness and integrity of the R&D Tax Incentive, including by sharpening its focus on encouraging additional R&D spending”.

The Review found that the R&D “programme falls short of meeting its stated objectives of additionality and spillovers” and that the “programme could be better targeted” to “generate greater benefit from the programme for the Australian economy”.

Accordingly, the report makes six recommendations for consideration “as a package of measures to improve the overall effectiveness and integrity of the programme while encouraging additional R&D”, specifically:

  1. Retain the current definition of eligible activities and expenses under the law, but develop new guidance, including plain English summaries, case studies and public rulings, to give greater clarity to the scope of eligible activities and expenses (Section 4.1, p. 30).
  2. Introduce a collaboration premium of up to 20 percent for the non-refundable tax offset to provide additional support for the collaborative element of R&D expenditures undertaken with publicly-funded research organisations. The premium would also apply to the cost of employing new STEM PhD or equivalent graduates in their first three years of employment. If an R&D intensity threshold is introduced (see Recommendation 4), companies falling below the threshold should still be able to access both elements of the collaboration premium (Section 4.2, p. 35).
  3. Introduce a cap in the order of $2 million on the annual cash refund payable under the R&D Tax Incentive, with remaining offsets to be treated as a non-refundable tax offset carried forward for use against future taxable income (Section 4.3, p. 37).
  4. Introduce an intensity threshold in the order of 1 to 2 percent for recipients of the non-refundable component of the R&D Tax Incentive, such that only R&D expenditure in excess of the threshold attracts a benefit (Section 4.4, p. 39).
  5. If an R&D intensity threshold is introduced, increase the expenditure threshold to $200 million so that large R&D-intensive companies retain an incentive to increase R&D in Australia (Section 4.4, p. 41).
  6. That the Government investigate options for improving the administration of the R&D Tax Incentive (e.g. adopting a single application process; developing a single programme database; reviewing the two-agency delivery model; and streamlining compliance review and findings processes) and additional resourcing that may be required to implement such enhancements. To improve transparency, the Government should also publish the names of companies claiming the R&D Tax Incentive and the amounts of R&D expenditure claimed (Sections 5.1-5.5, p. 45).
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According to the Media Release, the report will be considered in three phases, namely:

  1. First, submissions are invited from now until 28 October 2016. This will be accompanied by industry and state-based roundtables in all states and territories.
  2. Second, the Government will hold further discussions after all submissions have been received, during November and December.
  3. Finally, the Government will respond as part of a broader National Innovation and Science Agenda second wave, with the intention of finalising our response before the end of March 2017.

Good to see the Government tackling this issue. The much-hyped “innovation economy” and “ideas boom” cannot develop without a steady pipeline of R&D projects and investment.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.