Government’s proposed R&D changes – key points to cut through the noise

Earlier this week, the Senate inquiry’s report into the Government’s proposed cuts to the R&D tax incentive was delayed yet again – this time until after the Federal Budget in October.

Whilst this seemingly never-ending story is generating a lot of discussions, many startups and scaleups are wondering what this actually means for their R&D claims. Here, we cut through the noise to understand exactly what impact the proposed changes will have on businesses.

How did we get here?

As part of the Government’s National Innovation and Science Agenda back in 2016, a review was made into the effectiveness of the R&D tax incentive. The review found that the incentive was failing to achieve its objectives of generating additional R&D activities and so recommendations were made on how to address these failings, such as introducing a cap on the amount of eligible R&D expenditure that can be claimed.

In 2017, Innovation & Science Australia then provided their recommendations in their report “Australia 2030: Prosperity through Innovation”.

Subsequently, the Federal Government attempted to implement the main thrust of these recommendations on two separate occasions by releasing proposed changes to the incentive rules.

We focus on the most recent set of proposed changes and what impact to expect from each.

Impact on startups and scaleups

If the changes are passed in their current form (and that’s a big “if”) then the following is a summary of the key changes:

Proposed change: For companies with turnover of less than $20 million, linking the R&D tax offset to the company’s corporate tax rate + 13.5%.

Impact

Substantial, especially as the corporate tax rate is being lowered to 25% in the 2022 financial year. So for that year, a company with $1 million of eligible R&D expenditure would receive a refundable tax offset of $385,000 (being $1M x [25% + 13.5%]) instead of the currently legislated $435,000 ($1M x 43.5%) – a difference of $50,000.

Proposed change: For companies with turnover of at least $20 million, introducing an “intensity threshold” where the size of the R&D tax offset is determined by the percentage of the company’s spend on R&D expenditure compared to total business expenditure.

Impact

Minimal, as most startups would have less than $20 million in turnover.

Proposed change: Introducing a $4 million cap on the amount of the refundable tax offset.

Impact

Minimal, only applicable to companies with at least $9 million of R&D expenditure for the year.

Proposed change: Increasing the R&D expenditure threshold from $100 million to $150 million.

Impact

Minimal, most startups are not spending anywhere near this amount on R&D in a year.

Proposed change: Information about R&D claimants and their total spend on R&D expenditure to be published and made publicly available two years after the income year.

Impact

Medium, as this would allow competitors to see how much a startup spent on R&D, but only after two years has elapsed.

What we want to see from Government

Given the current COVID-19 disaster, the Government has regularly expressed its aspirations to use tax cuts and additional public spending to dig the Australian economy out of its doldrums. In that context, a two-year-old proposal to cut Government spending on R&D looks outdated and irrelevant. For businesses struggling with the financial impact of the pandemic, what is needed at this time is certainty and support from Government, not retrospective spending cuts.

Reinforcing this sentiment is the idea that even when the economy returns to a new form of normality, support of the tech sector is key to modernising the Australian economy and creating new jobs. Government support of R&D already lags behind peer OECD nations and any further cuts to the incentive would further stifle innovation instead of encouraging it. We are hopeful these changes will be scrapped altogether.

Insights and tips from our Experts

Tip:

Jack Qi – Director, Tax Services

If the bill is passed and you’ve already filed your tax return for 2019-20 financial year, you may need to amend your tax return. The changes will be implemented retrospectively which means you may have to revise (i.e. pay back a portion of) the claim you’ve already submitted. It’s best to understand in advance the cash flow impact of such a scenario.

Tip:

Alex Zinzopoulos, Senior Manager, Tax Services

If the changes go head, you’ll need to redesign your R&D budget and account for a smaller incentive than originally planned. The reduced benefit could impact your business model, so it’s important to consider other factors and scenarios that will support your goals such as strategic alliances or pivoting operations.

Government’s proposed R&D changes – key points to cut through the noise

Jack Qi

Jack is a Director in our Tax Services division and a Chartered Accountant with a specialisation in Australian technology companies from the startup stage to small-cap ASX-listed companies. Jack is an experienced accountant and advisor to tech companies, founders and investors - with an extensive track record of helping startups, scaleups and small-cap ASX-listed tech companies on their journey to commercialise, scale and go global.

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Government’s proposed R&D changes – key points to cut through the noise

Alex Zinzopoulos

Alex is a Senior Manager in our Tax Services division. He has built his experience working with a range of private and public companies in the technology sector, including companies that specialise in SaaS, Fintech, Data Science, Biotech, Regtech, IoT and Advanced Manufacturing. Alex has the knowledge and expertise to advise on complex tax issues including the R&D Tax Incentive, Export Market Development Grant, employee share schemes, tax consolidation and corporate restructures.

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