The Government’s R&D tax incentive “could be better targeted” and certain criteria tightened to improve payback on the public money invested in it, a review panel has found.
The review of the incentive was commissioned when the Government unveiled its $1.1 billion national innovation and science agenda (NISA) late last year.
The incentive itself is relatively new – introduced in 2011 – though its predecessor concession scheme had been operating since 1985.
Every year, a significant chunk of public money is pumped into the scheme, which represents “the largest component of Australian Government support for innovation”.
In 2013-14, 13,700 entities claimed $2.95 billion in offsets in order to perform a collective $19.5 billion of R&D.
But while those numbers appear impressive, the review panel of Innovation Australia chair Bill Ferris, Australia’s chief scientist Dr Alan Finkel and Secretary to the Treasury John Fraser – found the scheme is underperforming.
“The objectives, as stated in the programme’s legislation, are to ‘encourage industry to conduct research and development activities that might otherwise not be conducted…to benefit the wider Australian economy’,” the panel said in a report released this week.
“In other words, the Incentive seeks to encourage additional R&D (additionality) that benefits others (spillovers).
“Based on the best estimates of additionality and spillovers, the panel found that the programme could be better targeted.”
The panel is proposing a “package” of six reforms that have now been put out to interested parties to comment on.
The panel broadly had no issue with the eligibility criteria of the incentive, other than the rules being complicated and often requiring a consultant or tax agent to help decipher. (It recommends the use of plain English descriptions in future).
In any event, while there were arguments for and against redefining eligibility criteria, it was unclear to the panel what redefinition would work best and have the most benefit.
Rather, the review panel saw other ways to increase the efficacy of the incentive and the R&D output it encourages.
One possible change raised is a cap on the amount of cash refund that a company can claim. Already, a company needs to turn over less than $20 million to be eligible, but the panel proposed initiating a cap of around $2 million in incentive refunds, partly out of fear that present levels of cash returns are unsustainable.
“The generous nature of the refundable terms of the programme may attract unintended behavioural responses, which could be driving the higher-than-anticipated costs,” the panel said.
“Limiting the refund size would improve the integrity of the programme by limiting the potential benefit that can be obtained from that type of behaviour.”
The panel also proposes an “intensity” requirement for businesses seeking to avail themselves of non-refundable tax offsets, which would set a baseline for the percentage of “total business expenses” one has to commit to R&D in order to receive an offset.
“An intensity threshold would remove or substantially reduce the business as usual claims of some large and very large companies,” the review panel said.
They also propose raising the $100 million limit of eligible R&D expenditure each financial year that can be used to claim a tax offset, believing it may be stunting the program’s effectiveness.
“The expenditure threshold has effectively locked-in a maximum annual $10 million tax benefit to around 25 large and very large companies that undertake more than $100 million in R&D, removing their incentive to undertake additional R&D in Australia,” the panel said.
Though the present scheme is not designed to encourage R&D collaboration, the panel raises the prospect of incorporating collaboration, and encouraging it via a premium offset.
The panel also proposes a greater degree of transparency over the recipients of tax offsets.
“To place the programme into alignment with modern expectations and to allow public visibility of companies receiving public support for their activities, tax secrecy provisions should be adjusted to allow the publication of the names of companies claiming the Incentive and the amounts of R&D they have claimed,” it said.
The Minister for Industry, Innovation and Science Greg Hunt thanked the review panel for its findings, and said they would now be considered by Government and industry stakeholders alike.
“I thank the Review Panel for their comprehensive work in developing the paper and their considered recommendations,” Hunt said.
“The Government will respond as part of a broader National Innovation and Science Agenda second wave, with the intention of finalising our response before the end of March 2017.”