October 25, 2016

IRU Response to the Panel’s Research and Development Tax Review

The Review Panel, chaired by Mr Bill Ferris AC (Innovation Australia), Dr Alan Finkel AO (Chief Scientist) and Mr John Fraser (Secretary to the Treasury) was asked to identify opportunities to improve the effectiveness and integrity of the programme, including how its focus could be sharpened to encourage additional R&D. The Panel’s overall assessment is that the programme “falls short of meeting its stated objectives of additionality and spillovers” and that the programme could be “better targeted”.

In general the Panel’s report is in line with the IRU recommendations (below) to improve the incentives for industry to work with publicly-funded research organisations and to simplify the administration of the tax incentive. As expected, the Panel does not make a specific recommendation to include research in social sciences, arts and humanities (currently excluded) in the list of eligible activities. The Panel comes to the conclusion that it is too soon after the programme’s introduction to change the definition of eligible activities and expenses under the law.

The Panel makes six key recommendations: 

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).This is line with the IRU’s recommendation for strengthening the incentive for Research and Development carried out through publicly-funded research bodies 

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).This is in line with the IRU’s recommendation for an efficient user-friendly application process.

Further information can be obtained here: https://www.business.gov.au/Assistance/Research-and-Development-Tax-Incentive/Review-of-the-RandD-Tax-Incentive

Read the full IRU response below.