BDO flags potential policy gaps with R&D review recommendations

Last week, the independent panel responsible for reviewing Australia's research and development settings handed down its final recommendations.

The panel's final report proposed a significant redesign of the research and development tax incentive (RDTI) but BDO has warned there are potential policy gaps with some of the recommendations.

While the report identified the RDTI as a key policy lever, it argued that reform was needed to increase its impact and better support high-growth, innovative businesses.

The proposals would represent a complete overhaul of the program, according to BDO.

However, the accounting firm warned that the scale of the proposed reforms means they may be "challenging to legislate and potentially even more challenging to administer in practice".

It also warned that the proposed framework could introduce substantially greater complexity.

"The current system differentiates between refundable and non-refundable offsets based on turnover and is largely industry agnostic," the accounting firm said.

"The proposed model introduces on- and off-ramps linked to revenue growth, alongside sector-specific carve-outs and premium incentive streams, significantly increasing the complexity of the program."

One of the key proposals by the panel is for the government to establish a premium RDTI stream for startups.

The proposal aims to support high-growth early-stage companies through a higher refundable offset of 23.5 per cent above the company tax rate, simplified eligibility rules, quarterly payments rather than annual refunds and expanded eligible activities, including some early commercialisation work.

BDO said these changes are intended to improve startup cash flow and reduce reliance on advisers or financing arrangements while waiting for RDTI refunds.

"However, eligibility will be limited to companies meeting specific innovation criteria, such as venture capital backing or participation in recognised accelerator programs."

"Businesses that are bootstrapping their R&D activities may fall outside the program, particularly with the proposed increase in the minimum R&D expenditure threshold to $150,000."

While the report proposes an innovation voucher program as an alternative support mechanism, BDO said, this may not necessarily provide the same level of support for undertaking R&D itself.

"In addition, eligibility is proposed to be limited to three years, with a process to reapply every three years for a further three-year period for companies in industries with longer development timeframes such as pharmaceuticals," the firm said.

The report also proposed several administrative changes to simplify the RDTI, such as introducing a deemed rate for supporting R&D activities, increasing the minimum R&D expenditure threshold and removing certain clawback rules where businesses receive government grants.

"While the proposed simplification measures are welcome, they are unlikely to fully offset the additional complexity introduced elsewhere in the redesigned RDTI framework," BDO said.

BDO said the introduction of a deemed rate for supporting activities may simplify claims for some taxpayers, but it could be concerning for industries where supporting activity expenditure can equal or exceed core R&D due to substantial upfront research, or where supporting activities occur in earlier years while core activities take place later.

"A more practical approach may be to treat the deemed rate as a safe harbour, while still allowing detailed registration and costing of supporting activities where higher expenditure can be substantiated," it said.

The accounting firm noted that for many businesses, the refundable RDTI has historically helped support innovation during periods where revenue growth is limited.

External shocks may also affect SME eligibility under growth-based criteria, BDO warned.

"Businesses in sectors such as agriculture, manufacturing or regional industries can experience sudden revenue declines due to severe weather events such as floods or droughts, supply chain disruptions, commodity price volatility and broader economic downturns," it said.

"In these circumstances, otherwise innovative businesses could lose access to RDTI support despite continuing to undertake valuable R&D."

Innovation also occurs within mature or lower-growth companies seeking to transform existing products or processes, said BDO, which means that flexibility in any redesigned framework will be important.

BDO said the recommendations in the Ambitious Australia report will likely form part of ongoing policy discussions around innovation and productivity.

Given the scale of the proposed reforms, any changes to the RDTI would likely involve industry consultation and detailed legislative design," it said.

"Businesses currently accessing the RDTI should monitor developments closely, particularly if their eligibility could be affected by growth-based criteria or revised thresholds."