Trimming R&D tax incentives a ‘big hit’ to businesses

William Buck partner, R&D incentives and grants, Berrin Daricili, noted that two proposals in Treasury’s draft laws on changes to the research and development (R&D) tax incentives concern her and her colleagues in the industry.

The government said the proposed changes simplify and refine the R&D tax incentive to better incentivise business R&D spending in Australia to reap economic benefits while slashing growth in the fiscal cost of the incentive.

The amendments cut support for R&D activities from the R&D tax incentive, increase the minimum and maximum expenditure thresholds, and increase the turnover threshold for the refundable offset.

Under the new proposed law, expenditure on supporting R&D activities would not be eligible to receive the tax offset, while “core R&D activities” would be renamed “R&D activities”.

The current law makes the tax incentive available for both core and supporting R&D activities, where the supporting activities are directly related to the core activities.

Daricili told Accounting Times that these supporting activities are central to completing the core R&D activities and translating them into commercial outcomes.

“The removal of this tax incentive could potentially be a big hit to businesses,” she said.

“Genuine research and development do not happen in isolation. The experiments can depend on prototypes, construction, engineering iterations, data collection, system integration, trial production, and regulatory testing. Those activities are not always experimental in nature. But they are critical to completing the work.”

Daricili also has concerns around the proposed amendment to restrict access to the refundable offset for entities in the period of the first 10 years of carrying on an enterprise or from the point of first registration for the R&D tax incentive. Entities conducting R&D activities related to therapeutic goods would face a 15-year limit.

The amendments would give a non-refundable offset at the highest tax offset rate for entities beyond the first 10 years of carrying on an enterprise or being registered for the R&D tax incentive, with an aggregated turnover of less than $50 million.

Daricili differentiated between the two types of entities, stating that those qualifying for the latter are loss-making companies that are given access to immediate cash refunds.

“That distinction between receiving a refund versus just a tax offset is important because many innovative businesses use that refund to support the next stage of their research and development to hire new staff and continue their growth trajectory,” she said.

“I’d say that when you’re looking at the full picture, the higher rates that have been proposed are not necessarily a better incentive if less expenditure qualifies, or if the overall benefits become less accessible or less valuable to businesses. A higher headline rate that’s been proposed in increasing the offset rate is not necessarily a better incentive if less expenditure qualifies, or if the benefits are no longer available to certain companies.”

The proposed 10 or 15-year cliff could discourage investment in research and development, particularly in sectors with long research and regulatory pathways that take a long time to receive approvals and reach the commercialisation stage, Daricili said.

“The reality is your businesses and activities don’t just follow a 10-year timetable from inception to commercialisation,” she said.

“Businesses might spend years and years undertaking the foundation research, developing their IP, conducting those trials, getting their results, and assessing them over several years before they could even start earning revenue on that. They could still be loss-making and investing heavily in R&D after their first decade and not receiving the same benefit that they would now.”

The government’s proposed amendments are based on the recommendations made in the Ambitious Australia report, published by the Department of Industry, Science and Resources.

While noting that some companies using the R&D tax incentive scheme were SMEs that were not growing, the report recommended that the incentive be simplified and changed to improve its impact and reduce complexity, cost, and integrity.

The ATO’s figures revealed that almost $17 billion was invested in qualifying research and development by companies in 2023–24, up from $16 billion in the previous year.

Daricili questioned whether the amendments in the draft legislation would advance the report’s broader objectives of improving commercialisation outcomes of research and development activities, supporting the scaling of businesses, and strengthening Australia’s competitiveness overseas.

“While we strongly support these objectives, my concern is that reducing eligibility criteria for supporting R&D activities from the tax incentive could reduce assistance for work that bridges experimentation and commercialisation. This is something that needs to occur to help these companies start producing revenue,” she said.

Daricili said she has had initial discussions with clients around potential impacts on their cash flow and ability to claim the tax incentive.

“Clients are asking us when the 10-year period starts,” she said.

“Is it from the date of incorporation of the company? Is it from the date of first conducting R&D? That’s where our discussions have been.”

She said she is encouraging businesses to track the potential changes but continue claiming returns according to the current law.