No need for arbitrary R&D tax incentive restrictions

In its submission to Treasury on the exposure draft legislation to amend the research and development tax incentive (RDTI), the Business Council of Australia (BCA) said it supports several proposals by the government.

This includes increasing the turnover threshold for the refundable offset from $20 million to $50 million, and increasing the maximum expenditure eligible for the premium offset from $150 million to $200 million.

But the body said that it maintains that the threshold should be increased to at least $250 million and indexed, with a longer-term objective of removing it altogether.

“However, the benefits of these reforms should not be offset by measures that arbitrarily restrict access to refundability or narrow the range of legitimate R&D expenditure supported by the scheme,” the submission said.

Scrap age restriction

As such, the BCA said it does not support the proposed 10-year limit on access to the refundable offset, with a 15-year extension for eligible therapeutic goods research and development, and recommended that both age restrictions on access to the refundable RDTI proposed in the draft legislation be removed.

It explained that company age is a poor proxy for research and development impact and maturity, adding that long development cycles are not unique to therapeutic goods.

“Deep technology, advanced manufacturing, clean energy, quantum, defence and other capital-intensive technologies can also require long periods before generating sustainable revenue,” it said.

Furthermore, it pointed out that a company may begin a significant new R&D program more than 10 years after establishment yet be ineligible for the refundable offset from the outset.

“Nor do businesses scale to a fixed timetable. Members have highlighted that Australian businesses can remain at similar stages of development well into the seven to 12-year period, depending on market conditions and access to capital,” the submission said.

“Funding at this stage often comes from a mix of revenue, RDTI support, debt and equity. Removing refundability at an arbitrary 10 -year point could disrupt this funding mix just as a business is seeking to commercialise and scale.”

Instead, it proposed that the age restriction be removed or replaced with an outcomes-based approach consistent with the Strategic Examination of R&D (SERD) final report, Ambitious Australia, and focused on indicators such as sustained growth and R&D investment rather than corporate age.

SERD proposed linking ongoing access to refundable support to business growth and outcomes, including an on-and-off ramp based on revenue growth rather than company age.

The BCA’s submission said this better reflects the reality that businesses reach commercial maturity at different stages and withdrawing refundability during a critical growth phase could hinder scaling.

Supporting activities vital to R&D

The BCA also echoed others in the accounting industry who do not support the proposal to remove supporting R&D activities from the RDTI.

The exposure draft explanatory material stated that under the proposed new law, expenditure on supporting R&D activities would not be eligible to receive the tax offset. As such, the concept of “core R&D activities” would be renamed “R&D activities”, it said.

The BCA said this change would risk excluding expenditure that is integral to genuine R&D but is not itself experimental. It added that the current regime already includes safeguards where supporting activities must directly be related to core R&D, with a higher dominant-purpose test applying to certain activities.

“A narrower expenditure base would also dilute the benefit of the higher offset rates proposed in the exposure draft,” the submission said.

“For businesses with significant supporting expenditure, a higher rate applied to a smaller base may deliver a much smaller benefit than the headline changes suggest. Removing supporting activities would also create implementation uncertainty, particularly for industrial and engineering R&D undertaken in operating environments.”

The BCA recommended that the SERD approach be implemented where supporting activities are retained through a deemed rate for supporting R&D expenditure to reduce ambiguity, record-keeping, and administrative burden.

“The BCA considers this a more proportionate way to address complexity and integrity concerns while continuing to support genuine R&D,” it said.

Modernise definitions of eligible R&D

Alongside this, it called for the modernising of the definition of eligible R&D to better reflect contemporary industry-led research and the full systematic experimental process, drawing on the OECD Frascati framework and developed in consultation with industry.

“The proposed removal of supporting activities reinforces the need to modernise Australia’s definition of eligible R&D,” the submission said.

“The BCA has previously raised concerns that the current definition is too narrow and poorly aligned with contemporary industry-led innovation, particularly in sectors such as software, engineering, mining and manufacturing.”

Highlighting that businesses make investment decisions around complete R&D programs and modern R&D rarely occurs as a single, isolated experiment, the BCA said artificially separating integrated activities for tax purposes would increase complexity and weaken the case for locating the overall program in Australia.

“If supporting activities are removed without modernising the underlying definition, Australia risks excluding legitimate experimental activity and making competing jurisdictions more attractive for integrated R&D investment,” the submission said.