Review panel proposes complete overhaul of R&D tax incentive

An independent panel chaired by Robyn Denholm has released its report on how to optimise Australia's R&D system following its independent review.

Many of the key recommendations in the report focused on reforming and simplifying the R&D tax incentive.

The report recommended that the R&D tax incentive (RDTI) be reformed to simplify administration and focus the scheme for greater impact.

"The majority of companies using the RDTI scheme are SMEs. Many of these are not growing. The RDTI must be reformed to focus on growth-focused businesses only, including scale-ups, that reinvest in RD&I activities," it said.

The government, it said, should incentivise startups through a premium RDTI segment providing streamlined access to improved benefits for high-potential firms.

The report also called for an increase in RDTI incentives for corporations and multinational corporations to undertake local research and development activities and to drive partnerships, procurement, investment, and M&A.

"The panel believes the RDTI scheme is core to incentivising the private sector to invest more in Australian RD&I," the report said.

"The recommendations aim to increase private sector investment, extend eligibility to translation and commercialisation of research into products and services, and reduce the bureaucracy and leakage of funding to administrative activities."

In terms of its recommendations for simplifying the RDTI scheme, the report suggested introducing a deemed rate for supporting activities – a fixed offset benefit relative to the amount of core R&D expenditure claimed.

"This would reduce ambiguity in self-assessment of supporting activities, reduce record-keeping obligations, and streamline the assessment process for regulators," it said.

"It offers a simple and predictable way for applicants to calculate the benefit they can incorporate into business planning."

It also recommended raising the minimum R&D project expenditure floor, currently set at $20,000, to a minimum annual R&D project spend of $150,000.

The report said this would limit access for companies conducting sub-scale R&D projects.

"This will calibrate the program towards encouraging companies to invest in more ambitious, high-impact R&D activities," it said.

The report warned that a reformed RDTI scheme would mean that some businesses, particularly low-growth SMEs, may become ineligible.

It recommended that the government establish an alternative funding mechanism for these businesses to kick-start their research and development efforts through access to Australian research capability in universities, publicly funded research agencies (PFRAs) and innovation-intensive corporations.

Denholm said tax incentives and deregulation were central to stimulating the private sector to invest in research and development.

"The panel’s recommended reforms will support businesses that have the ambition to drive the growth and deliver the jobs that will sustain our standard of living," she said.

"A revitalised RD&I system is the catalyst Australia needs to secure sustainable growth for the next generation."

Minister for Industry and Innovation and Minister for Science, Tim Ayres, said the report charts out a long-term reform roadmap for the government to consider over the coming months.

"A Future Made in Australia requires bold and visionary private, public and institutional research and development capability together with mobilised scientists and engineers and I am keen to grasp the challenge and work with the sector to deliver that," Minister Ayres said.