R&D Tax Incentive lodgements are approaching – lodge by 30 April 2019
One of the challenges in assessing Corporate Australia’s views on the proposed changes to the R&D Tax Incentive is that many businesses are not prepared to publicly voice their opinion.
This is for two main reasons: concerns that any meaningful comment will provide competitors with information they otherwise would not have access to, and concern that expressing a view could pique interest from the ATO and AusIndustry.
To overcome this issue, Glasshouse Advisory conducted a survey on an anonymous basis, where companies were asked 10 questions, each of which included the opportunity for the company to make comments. Companies surveyed had annual turnover of more than $20m and included a range in terms of size and industry. The survey results are in line with anecdotal evidence heard across industries that are likely to face severe cuts to R&D incentives.
The survey revealed a common view that the Government has not provided Corporate Australia with sufficient details on how the proposed changes to the R&D Tax Incentive program will impact them. There was also disappointment that the Government had tried to mask the changes in the R&D program by introducing the amendments to Parliament in a Bill titled Making Sure Multinationals Pay Their Fair Share of Tax in Australia.
Notable outcomes from the survey included:
Q. If you are adversely impacted by the new legislation introduced by the Government, are you likely to do any of the following, given the reduction in R&D benefit?
“Our company is part of a multinational group and we are in the process of evaluating where to establish a ‘Centre of Excellence’ in the Asia Pacific region. Australia, Singapore and Malaysia were on the shortlist for locations; however, Australia has now been taken off the evaluation list replaced by New Zealand. This is disappointing for me, having championed Australia as a great location to do R&D (facilities, access to world class universities, experienced technical people, etc), but this latest change to Australia’s R&D program created too much uncertainty for such an investment, and the 4% benefit we will be eligible to access is so low, one of the overseas directors jokingly said he can get a better return on investment by putting the money in the bank.” - Survey respondent
Over 55% of respondents indicated they would reduce staff involved in R&D activities within their business, with one respondent indicating they had already closed down an R&D team located at one of their facilities (a loss of 7 jobs). Over 20% of respondents indicated they would investigate moving their R&D function offshore.
There was a significant number of comments associated with this option, with several companies indicating they already had operations in New Zealand and given the mobility of their R&D (i.e. a team of specialists developing innovative manufacturing technology), they were already investigating moving the team to New Zealand (which has introduced a 15% tax benefit for all eligible R&D activities).
Q. If you are disadvantaged by the new legislation are you likely to reduce the amount of R&D you have historically undertaken?
“R&D projects that included Australian based universities would decrease.”
“R&D projects put forward by the business will need shorter pay back periods.”
“Blue sky R&D will be stopped.”
The results and comments associated with this question are very concerning, with many companies clearly identifying that the low R&D Tax Incentive available to them under the proposed new legislation (i.e. 4% tax benefit) will act as a disincentive to use discretionary spend within the company on R&D activities. A 4% return on investment will mean that some projects will not go forward, simply because the payback period for the project will be too long or the benefits available from investing in other areas of the business are greater than 4%.
The responses to this question are clear evidence that rather than motivating companies to spend more on R&D to try to reach the next tier of benefits (i.e. up to a maximum of 12.5%), the program is a disincentive. The fact that over 83% of surveyed companies indicated they will only ever be able to access a 4% tax benefit is clearly influencing corporate decisions on discretionary spend and R&D will be the big loser if the proposed legislation comes into effect.
Q. Will your company be advantaged or disadvantaged by the proposed legislation?
A number of respondents expressed concern that they would not be able to definitively calculate their R&D intensity at the start of the financial year, due to the fact that ‘total expenditure’ is deemed to be the figure at Item 6 on the Company’s income tax return, a number that is only definitively known after the end of a financial year.
Several respondents indicated that if they cannot confidently calculate their R&D intensity at the start of the financial year, it was likely to impact their decision making around R&D expenditure. Other companies pointed out that, due to their functionally diverse corporate structure, (which incorporated sales and distribution functions as well as R&D focused entities), they will never achieve an R&D intensity of more than 2%, meaning their R&D benefit would be more than halved.
One respondent commented that, “The Bill was introduced to Parliament under the name ‘Making Sure Multinationals Pay their Fair Share of Tax in Australia’, but the Government is giving multinationals a financial advantage with the proposed legislation that Australian based multinationals are unable to access – surely this can’t be right and if it is, surely this needs to be addressed so Australian companies aren’t financially disadvantaged.”
It is clear large companies who can only access the minimum 4% R&D benefit under the proposed new R&D Tax Incentive program are actually looking at alternatives and options outside of Australia. These considerations include where to conduct future R&D and whether to maintain or reduce current R&D activities (taking into account that some proportion of R&D is a discretionary spend for most companies).
From an Australian perspective, the proximity to New Zealand (with its 15% benefit for all R&D activities), the mobility of many aspects of an R&D program (i.e. the people who conduct the R&D) and the fact that the 4% benefit available to most large, functionally diverse companies are all likely to drive innovation offshore rather than incentivise businesses to invest more in R&D within Australia, which will clearly be detrimental to the Australian economy.
This will likely lead to a further reduction in Australia’s Gross Expenditure on R&D as a percentage of the GDP, which currently stands at 2.11%, well below the OECD average of 2.38%.
None of this presents Australia as a stable destination for companies to conduct their R&D, with the proposed R&D legislation acting as a disincentive, rather than an incentive to spend more on R&D activities, which is contrary to one of the stated objectives for the proposed changes to the current legislation.
There are a number of takeaways from the survey, none of which are good from an Australian economic perspective or for attracting innovative companies to Australia.
While a number of questions revealed Corporate Australia was unhappy with the lack of transparency around the non-release of public submissions and the surreptitious manner in which the Bill was introduced into Parliament (resulting in a loss of trust in the Government around this issue), the primary takeaway is that a considerable proportion of Australia’s most innovative companies will be significantly disadvantaged as a result of the proposed changes to the R&D Tax Incentive program, with most of the impacted companies having their benefit more than halved.
With a 4% tax benefit available to these impacted companies, the survey indicates that rather than being motivated to do more R&D in order to reach the next tier of benefit (as anticipated by the Government) these companies are looking at options that include closing down R&D facilities and businesses in Australia as well as moving their R&D function to a jurisdiction with a more stable and predictable R&D rebate, where the rate of benefit acts as an incentive to conduct more and riskier R&D, for the benefit of the local economy.
The new R&D legislation was recently referred to a Senate Economics Legislation Committee for further consideration, including an opportunity for public submissions.
The time frame for submissions is very tight, with the deadline being 5th November 2018. The Senate Committee will report on their findings on the 3rd December 2018.
Contact our R&D tax experts to discuss this article, the outcomes of the survey or to learn more about how the R&D tax incentive program.