Small business looks to lose as the government tees up changes to research and development (R&D) tax incentives.
Reforms to R&D tax incentives were introduced to federal parliament last week and will net the budget an extra $1.8 billion over the next four years.
In his second reading speech, Treasurer Josh Frydenberg said the reforms were designed to “ensure that the tax incentive remains an effective and sustainable part of Australia's overall support for R&D”.
“In better targeting and improving the integrity and sustainability of the research and development tax incentive, the reforms in this bill will ensure that the incentive remains an important part of the government's overall support for research and development in Australia,” Frydenberg said.
Small companies – those with an annual turnover less than $20 million – are having their R&D tax offset rate adjusted from a flat rate of 43.5 per cent to a rate now equal to their corporate tax rate plus a 13.5 per cent premium.
R&D tax incentive specialist, Daniel Ronai, said in an article on AuManufacturing that the latest amendments help recover losses from previous changes to the law that didn’t have the desired effects.
“As the incentive hinged on the difference between the corporate tax rate and the tax offset, the outcome was an increase rather than a decrease as corporate tax rates have been reduced since then,” Ronai said.
“In essence this takes the benefit for companies with less than $20 million turnover to what was intended a few years ago.”
Ronai said the new changes means those smaller companies will see an “an effective reduction of just over 15 per cent in their benefits”.
Changes for larger companies (annual turnover greater than $20 million) will see an increase in the incentive’s cap on R&D expenditure raised from $100 to $150 million.
Large companies will also be able to claim their R&D tax offset based on a new ‘intensity premium’ which increases the offset percentage based on their R&D expenditure.
Ronai said most companies using the R&D tax incentives are at the low end of expenditure intensity.
“Around 1,030 (almost two thirds) of the non-refundable companies claiming the R&D tax offset have intensities of 4 per cent or lower,” he said.
“This would result in their benefit dropping from the current 8.5 per cent to 4.5 per cent – in real terms a drop of almost 50 per cent.
“An applicant in the 4 per cent or lower R&D intensity would have been spending $1 million previously and received $85,000, but now that same applicant with the same expenses would receive $45,000.”
The opposition attacked the government’s approach to the R&D tax incentive.
Shadow Industry and Innovation Ministers, Brendan O’Connor and Clare O’Neill, said in a joint statement that they thought more should be done to support local innovation.
“At a time when investment in research and development is in decline compared to other countries, it is concerning that the Morrison government has reintroduced a controversial bill amending the Research and Development Tax Incentive,” the statement said.
“Last Parliament when the Government first sought to cut around $2 billion from R&D, it slipped the measure into a bill titled ‘Making Sure Multinationals Pay Their Fair Share of Tax in Australia’ – a misnomer given a large number of firms affected are Australian start-ups and small and medium enterprises.
“The total human resources devoted to business R&D is still well below what was devoted when the government took office.
“In 2013-14 total ‘person years of effort’ was 78,839, whereas the most recent data is 74,991 – almost 5 per cent lower.”