2.1
This chapter summarises the views held by stakeholders on the provisions of the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 (the bill). The chapter is intended to provide an indicative, though not exhaustive, account of the key issues examined during the committee's inquiry.
2.2
Following a call for submissions, the committee received 93 submissions from interested parties. The majority of these submissions raised concerns with the provisions of the bill, especially regarding Schedule 1—Better targeting the RDTI.
2.3
The following discussion is separated into the following sections:
views and recommendations resulting from the Senate Economics Legislation Committee's prior inquiry into a related bill;
general views of R&D policy within Australia; and
views on better targeting the RDTI.
Senate Economics Legislation Committee's 2018 bill inquiry
2.4
As discussed in chapter 1, on 18 October 2018, the Senate referred the provisions of the prior bill to the Senate Economics Legislation Committee
(the committee) for inquiry and report. The committee held three public hearings and received 75 submissions. At the conclusion of its inquiry, the committee held the following view:
The committee notes the findings of the 2016 Review of the R&D tax incentive [the Three Fs Review], in particular that the R&D tax incentive program falls short of meeting its stated objectives of additionality and spill-overs. On balance the committee supports this bill in its intent to address this issue.
The committee was pleased to hear that the R&D tax incentive program had had a positive impact on many Australian businesses and researchers.
On examination of the proposed $4 million cap on the refundable tax offset, the committee believes that it would benefit from some finessing to ensure that R&D entities that have already made investment commitments are not impeded unintentionally.
The committee also notes the concerns raised by participants in relation to the calculation of the proposed intensity premium. The committee shares participants' concerns that this intensity measure may have unintended consequences for larger R&D entities undertaking eligible R&D activities.
The committee considers that, as currently drafted, the proposed intensity measure has possible unintended consequences that may disadvantage a range of Australian R&D entities.
2.5
In its final report to the Senate on 11 February 2019, the committee made the following recommendations in relation to the prior bill:
The committee recommends that the Senate defer consideration of the bill until further examination and analysis of the impact of schedules 1–3 [the schedules related to the RDTI] is undertaken. In particular, the committee recommends that:
the approach to the cap on the refundable portion of the Research and Development (R&D) tax incentive is refined, noting investment decisions already taken; and
the formula for R&D intensity is refined, noting inherent differences in R&D intensity across industries and impacts on businesses with large operating costs.
General views on R&D policy within Australia
2.6
A number of inquiry participants were concerned with the decline in Australia's R&D effort and the government's general approach to supporting it in Australia. A number of submitters and witnesses drew attention to the decrease over the last ten years in R&D investment in Australia. For example, Universities Australia, in its submission, noted that:
Australia’s investment has been in decline for over a decade, from 2.25 per cent of GDP in 2008 [to 1.79 per cent in 2017], and there is no sign of stabilisation. This contrasts with a small but steady increase in the OECD average over the same period, from 2.28 per cent to 2.37 per cent. At 1.79 per cent of GDP, Australia lags behind our competitors and is now well below the OECD average.
Business expenditure on R&D as a share of GDP declined by 31 per cent from a peak of 1.37 per cent in 2008 to 0.94 per cent in 2017-18. Government expenditure has declined by a similar percentage.
2.7
KPMG noted the importance of R&D expenditure to Australia's wellbeing, stating:
Australia's global competitiveness and future prosperity depends on our ability to translate our inventiveness into successful commercial outcomes. Business investment in R&D, supported by the RDTI, is fundamental to that success. However, reductions to tax incentives and instability in the program can have the opposite effect.
2.8
The AMWU believes the reforms made by the bill send the wrong message, and will discourage investment and lead companies to transfer highly‑skilled jobs overseas. It believes this will result in lower productivity growth, a less competitive manufacturing industry, less investment in capital and, in the long run, few jobs and lower wages.
2.9
GlaxoSmithKline (GSK), an international healthcare company, is concerned with the government's failure to adequately consult with industry, and notes that the proposed reforms may have unintended consequences, such as jobs losses and reductions in export revenues generated by local manufacturing, and reductions in investments in scientific research across the Australian medical and research communities.
2.10
CPA Australia states that 'the government should be cautious not to restrict or impede R&D in Australia simply because of the direct short-term impact on the budget, especially when it is seeking to develop an innovative, high-tech economy with a deep pool of science, technology, engineering and maths labour.'
2.11
Charles Sturt University is concerned that the government's policy framework for publicly-funded research is focused on larger firms and metropolitan universities, and that this approach does not always meet the needs of Australian industry or result in significant positive impacts for regional economies.
2.12
Although supportive of the reforms to the RDTI which improve its targeting, Cochlear does not support an overall reduction in government incentives for research, development, and innovation. In its submission, Cochlear also recommends the government take a broader approach to supporting R&D than solely providing tax incentives. Specifically, it states:
Australia is unique in having such a heavy focus on a tax incentive as the main government funded initiative to drive BERD [business expenditure on R&D] and innovation. Ideally the Australian Government would be increasing its overall funding support for business related innovation underpinned by a comprehensive and coordinated Australia wide strategy.
2.13
Australia's peak industry group for the medicines industry, Medicines Australia, opposes the proposed reforms and notes the impact it may have on ongoing R&D investment within Australia. Specifically it notes that:
…medicines investment is high-risk with approximately only 12 per cent of medicines that enter clinical trials reaching approval for use by patients at an estimated investment of $2.55bn. Therefore, our industry is highly reliant on a stable policy environment that strongly supports innovation, research and development, and commercial translation to the same levels as competitor nations. Without these policies, there will be limited incentive for ongoing investment into Australia.
2.14
StartupAUS, in its submission, drew attention to the importance of the RDTI for start-up businesses operating in Australia, stating that:
Research conducted by StartupAUS indicates unambiguously that the RDTI is a critical part of the success of startups in Australia. In a survey of 74 startups conducted by StartupAUS, 89 per cent of national respondents reported that the RDTI was either critical (68.9 per cent) or very important (20.3 per cent) to their business.
2.15
Australian Information Industry Association (AIIA) also noted the present potential impact of the bill will be compounded by the current Covid 19 crisis stating:
Due to COVID, I have been informed that some SMEs, especially technology start-ups, have taken out loans against the R&D cash refund they were hoping to receive in a few months. Any changes that reduce the FY20 or even FY21 benefit will have an immediate and significant impact on those companies and their ability to bring innovative products and services to market.
2.16
Atlassian stated that while there is heavy reliance by many nascent start-up tech companies on the incentive in their early stage development, the RDTI was more important than ever in the current COVID situation.
Even before the COVID-19 pandemic, many technology companies were reliant on the RDTI to support them at the critical early stages of their businesses. In this continually evolving COVID crisis, the incentive is more important than ever to the economic recovery and revival of the tech sector.
Better targeting the RDTI
Targeting the intensity measure
2.17
Mr Calder explained the rationale for the adoption of the changes to better target the intensity measure of the bill:
[the government] in 2018 picked an intensity measure that would not exclude any businesses or any companies from receiving some level of support for their eligible R&D activities but would try to target that support to companies with higher levels of R&D intensity. The [three Fs] review report itself found that companies with a high level of R&D intensity were more likely to create spill-over benefits for the rest of the economy. Benefits that a company can't internalise itself spill over to other stakeholders within the industry so that they can utilise that knowledge. That was based on a four-tier method. Again, the metric remains the same—R&D expenses over total expenses—and then subsequently moves to a three-tier intensity model, again using exactly the same methodology that had been proposed by the review when it released its report in 2016.
2.18
As such, Mr Calder described the present bill as 'a recalibration of the intensity test' which moved from the previous 2019 bill's four-tier intensity model to increase the generosity of the intensity test compared with the previous bill to a three-tier intensity model.
2.19
Furthermore, Mr Calder noted the possible constraining variables in regard to settling on the intensity measures and metrics that should be adopted.
All of them would have some degree of distortional impact. You might change the conditions for one company and then change them in the opposite direction for another company. It was decided to go with the simplest measure, the one indicated by the recommendations of the
[three Fs] review. The R&D tax incentive will only give companies a relatively modest reward for eligible R&D activities in Australia. The issue around companies offshoring or moving their operations overseas would be based on a range of factors, and the R&D tax incentive, in our view, would only be a small component of that decision.
2.20
In response to claims of possible offshoring of operations and loss of jobs based on changes to the intensity measure, Mr Calder stated that:
Decisions about where companies locate their operations would be based on a range of factors that they need to consider, part of which will be access to a skilled workforce. Australia has a highly skilled R&D and university sector to contribute to that R&D activity. There's the extent to which Australia is a relatively stable economy; it has long periods of economic growth, providing opportunities for companies to grow their operations domestically.
2.21
Treasury officials also noted that the emphasis on the bill's measures were primarily to refocus tax payer funded R&D support to provide the necessary additionality in the economy not just reward businesses for business as usual.
That review [the three Fs] did identify that the R&DTI wasn't meeting its stated objectives. It wasn't providing additionality. It was rewarding businesses' usual activity.
2.22
Mr Richard Mulcahy CEO of Lighting Council Australia stated that:
To remain competitive, the member companies of the Lighting Council make substantial investments in R&D in Australia. The changes proposed in this bill will only further disadvantage these Australian manufacturers and are in sharp contrast to policy development internationally, including by our close neighbour New Zealand and by the UK, which have both recently moved to increase R&D investment—by £22 billion, in the instance of the UK.
Clarity around eligible expenditure
2.23
A number of inquiry participants raised their concerns around the ambiguity of the types of expenditure which are considered eligible and the technical language used. For example, StartupAUS stated that:
Thanks to shifts in interpretation, the RDTI is currently failing to adequately support software development activities. Any amendments to the scheme (such as those proposed by this Bill) should address this shift away from support for software development activities by adding clarifying language to the scheme reinforcing the eligibility of software development activities.
2.24
In agreement with the above, CPA Australia recommended that the issues around software R&D be addressed through amending definitions in line with a review undertaken by the ASBFEO and the 2015 update to the OECD's Frascati Manual.
2.25
Startup Victoria raised the technical and legal nature of the language used when determining an entities eligibility for the RDTI, and recommended the government:
…[m]ake the language and accessibility simpler. Many smaller technology companies that are eligible for the R&D Tax Incentive do not understand the legal and Government language used to describe what the incentive is, how it works and what is required in managing a claim. Many eligible startups do not take up the incentive for fear they are ineligible or will make a mistake in their claim and put their business at risk. The R&D scheme should be accessible enough to empower startups to submit claims without having to rely on experts.
Increasing the expenditure threshold
2.26
A number of inquiry participants raised the proposed increase in the R&D expenditure threshold, from $100 million to $150 million, in their submissions.
2.27
Although Cochlear supported the increase in the threshold to $150 million, it recommended the threshold be abolished. Specifically, it stated:
Cochlear strongly supports increasing and ultimately removing the expenditure cap. Ideally, the cap should be abolished or the increased cap of $150 million should be subject to a sunset clause and review in 2030 rather than made permanent as proposed. This is because a cap or maximum threshold at any level is arbitrary and effectively acts as a disincentive for any company investing large amounts into R&D to invest in Australia over that cap.
2.28
Similarly, Ai Group also did not see the rationale for the government to maintain the threshold on R&D expenditure, stating:
While Ai Groups is supporting the proposal to raise the cap on R&D spending from $100 million to $150 million, this is more because the higher cap would be better than the lower cap rather than because we see merit in the cap proposal in itself.
The rationale for the R&DTI is that it generates positive spill-overs. There is no reason to suggest that these would be lower once the amount of R&D spending exceeded a certain level. Indeed, under the logic implicit in the intensity approach proposed in the Bill, the external benefits flowing from a business undertaking more R&D spending are higher (other things being equal) than for a business with a lower R&D intensity.
This same logic would appear to be an argument against a cap on the level of R&D spending that can receive backing from the R&DTI. Yet the Bill proposes both the intensity measure and retaining the cap…
2.29
In its submission to the inquiry, Telstra highlighted the adverse interplay between the new marginal intensity premium structure and the increased threshold. Specifically, it observed:
The proposed intensity measure introduces a three-tiered incentive designed to encourage R&D expenditure, with the top tier having a generous “headline” rate of 12.5 percent. However, the imposition of a $150M cap ensures that businesses with expenses greater than $3.75 billion can never get beyond the first tier (4.5 percent net benefit) regardless of how much we actually spend on eligible R&D activities.
Extending eligibility to unincorporated businesses
2.30
The National Farmers' Federation (the Federation) noted in its submission that, although agricultural R&D has significant spill over benefits for the community, the majority of Australia's farming businesses are ineligible for the RDTI. This is because the majority of these businesses are sole traders and partnerships, which are ineligible under the scheme.
2.31
Given this, the Federation recommended that the RDTI be extended to unincorporated businesses to allow for these small and medium-sized farming businesses to be eligible for the RDTI.
RDTI for small entities
Linking the refundable RDTI to a claimant's corporate tax rate
2.32
Currently R&D entities with an aggregated turnover of less than $20 million are generally entitled to an R&D tax offset rate of 43.5 per cent. The bill amends this by making the R&D tax offset equal to the entities corporate tax rate plus a 13.5 per cent premium.
2.33
The Ai Group supports this proposed linking of the tax offset to an entity's corporate tax rate, as it believes it would better accommodate Australia's dual tax structure. CPA Australia, however, recommends that the $20 million threshold be increased to $50 million to align it with the company tax base rate entity threshold, instant-asset write off threshold, and the definition of small proprietary company per the Corporations Act 2001.
Capping the refundability of the RDTI
2.34
A number of witnesses supported the capping of the tax offset. Mr Reed from the Ai Group stated that:
We think that establishing the basis of the refundable tax offset at the corporate tax rate plus a 13.5 percentage point premium is a good clarification, along with capping the refundability of the tax offset at $4 million per annum.
We also support it [the cap] as an appropriate way to limit what appear to have been some abuses or excessive uses of the offset to date.
…there does seem to be a consensus and reasonably strong evidence presented in the course of the three F inquiry…that a cap would be appropriate.
Clinical trial exemptions
2.35
The development of medicines and vaccines rely on clinical trials to test and prove new pharmaceuticals for use. Some argued that the legislation should be amended to either exclude the life sciences sector or the intensity threshold requirements and manufacturing measurements should be removed from the bill as they create a disincentive to undertake R&D in Australia. Mrs de Somer, from Medicines Australia stated that the tax incentive is one important factor about where companies will commit to place clinical research.
…companies compete with their own affiliates in other countries to place clinical trials, and they have to demonstrate patient population, critical infrastructure, clinicians and expertise, which Australia does well in.
In Australia the positives in the commercialisation activities occurring here are our First World health infrastructure, our university and research infrastructure and critical skills. The quality of the work that is done in Australia is of very high quality. The things that also encourage research and development and commercialisation here are such things as the R&D tax incentive. I do think it is in fact the only legislative incentive from that perspective. The disincentives for doing it here are high energy costs, high labour costs, a reasonably small population and the speed of getting things done.
RDTI for large entities
Marginal intensity premiums
2.36
Large R&D companies with aggregate turnover of $20 million or more are entitled to an offset equal to their corporate tax rate plus one or more marginal intensity premiums. The government's introduction of this new structure was the central concern for a large number of submitters who stated they would be adversely affected. Although the vast majority of submitters were opposed to the measure, Cochlear, in its submission, believed that the new model would be an improvement on the current policy settings, stating in its submission:
Compared to the current policy settings, increasing the cap on expenditure in combination with the new intensity based premium tiers, would make the R&D environment in Australia more attractive to Cochlear.
2.37
Two professional accounting organisations, CPA Australia and Chartered Accountants Australia and New Zealand (CAANZ), opposed the proposal, with CPA stating that:
…the Bill constrains and complicates the R&D investment landscape and innovation ecosystems by further limiting access to funds through … either reducing or removing access to the R&DTI for key large Australian businesses and industries via the proposed intensity test.
2.38
A number of large international professional advisory firms also opposed the intensity model, with EY, KPMG, PwC, Deloitte and BDO all criticising it. BDO and Deloitte, in their respective submissions to the inquiry, stated the following:
We note that at 8.5 per cent, Australia already provides one of the lowest R&D tax subsidies for large entities across all OECD countries offering a volume‑based R&D tax credit, while the mean subsidy for large profit‑making companies across the OECD is 13 per cent. Under the proposed intensity test this subsidy will drop to just 4-5 per cent for a majority of large taxpayers, making Australia the least attractive jurisdiction in the OECD for entities.
Departmental questions on notice
2.39
Questions were put on notice by the committee to the Treasury, Australian Taxation Office (ATO) and the Department of Industry, Science and Energy (DISE) regarding the RDTI. Both Treasury and ATO failed to provide answers to QoNs by the requested date. The DISE provided answers to the QoNs in the required timeframe and these are can be found in Appendix xx.
Budget 2020-21—JobMaker Plan—Research and Development Tax Incentive—supporting Australia’s economic recovery measure
2.40
The committee notes that on 8 October 2020, the government, as part of the 2020-21 Budget, announced further enhancements to its 2019-20 MYEFO measure Better targeting the research and development tax incentive—refinements.
2.41
The new Budget measure, JobMaker Plan—Research and Development Tax Incentive—supporting Australia’s economic recovery, significantly modifies the proposals considered as part of this bill inquiry.
2.42
The government states that the Budget measure's enhancements are designed to support business R&D investment in Australia and help businesses manage the economic impacts of the COVID-19 pandemic and assist in the economy's recovery.
2.43
The measure will have no $4 million cap on annual cash refunds as outlined in the bill though it will continue to increase the R&D expenditure threshold from $100 million to $150 million, unchanged from the present bill's proposal.
2.44
Importantly, for small companies, with aggregated annual turnover of less than $20 million, the refundable R&D tax offset will increase by five percentage points from the current proposal of 13.5 percentage points to a generous 18.5 percentage points above the claimant’s company tax rate.
2.45
Significantly, for larger companies, those with aggregated annual turnover of $20 million or more, the government will reduce the number of R&D intensity tiers from the current proposed three tiers to two tiers. The government states that this will provide greater certainty for R&D investment while still rewarding those companies that commit a greater proportion of their business expenditure to R&D.
2.46
The R&D premium ties the rates of the non-refundable R&D tax offset to a company’s incremental R&D intensity, which is R&D expenditure as a proportion of total expenses for the year. The two new marginal R&D premium tiers will be the claimant’s company tax rate plus:
8.5 percentage points above the claimant’s company tax rate for R&D expenditure between 0 per cent and 2 per cent R&D intensity for larger companies; and
16.5 percentage points above the claimant’s company tax rate for R&D expenditure above 2 per cent R&D intensity for larger companies.
This represents a significant reduction in the level of R&D intensity required to receive a much large tax offset than originally proposed in the bill for large companies.
2.47
The government has also indicated that it will defer the commencement date so that all changes to the program apply to income years starting to 1 July 2021, to provide businesses with greater certainty as they navigate the economic impacts of the COVID-19 pandemic.
2.48
All other aspects of the 2019-20 MYEFO measure will remain unchanged. The new measure is estimated to decrease the underlying cash balance by $2.0 billion over the forward estimates period.
Committee view
2.49
The committee is supportive of well targeted tax payer funded assistance of research and development where it encourages activities with broad economic benefit. In particular the committee is very concerned about the impact that the COVID 19 pandemic is causing to the Australian economy and businesses and welcomes the certainty the new Budget measure provides business in a post COVID recovery.
2.50
The committee notes that, the new two-tier structure proposed in the Budget should encourage greater R&D expenditure than those measures proposed in the 2019 bill.
2.51
The committee also notes that the existing flat premium available to companies with an annual turnover above $20 million will be changed to one that increases generously as a company's R&D intensity increases. This will create further incentives to undertake R&D activities. Likewise, the committee sees the increase to the maximum amount of R&D expenditure eligible for concessional R&D tax offsets from $100 million to $150 million per annum as per the bill, as another incentive for greater R&D efforts. The committee considers that both these measures will assist the largest investors in R&D keeping their R&D activities in Australia.
2.52
The committee further notes that while the tax offset for smaller companies was 43.5 per cent (30 per cent corporate tax rate) with the proposed 13.5 per cent refundable R&D tax offset which was destine to fall with the implementation of new corporate tax rate of 27.5 per cent, under the government's generous Budget measure, this will now increase back up to by five percentage points to 46 per cent with the 18.5 per cent refundable R&D tax offset.
2.53
While many across the research and industry sector have found that the bill potentially did not hit the mark they were looking for, the committee considers that the new measure announced in the 2020-21 Budget should provide significant clarity and motivation for all sectors undertaking R&D.
2.54
Senator Slade Brockman