After closing the deal with the Palmer United Party, the Abbott government have made controversial changes to the research and development tax incentive by passing new legislation that will see a $100 million cap placed on the expenditures businesses can claim. The changes were initially announced in February 2013 as part of the Labor Governments Plan for Australian Jobs policy. According to experts, however, Australian companies will lose out against foreign players and it may result in lost jobs.
The original proposal in 2013 would have only affected approximately 20 of Australia’s largest companies, such as Telstra and Rio Tinto. This reform reduced tax offsets by 1.5% and abolished R&D tax incentives to companies with a $20 billion or more yearly turnover, saving the government nearly $1.1 billion over four years. This proposal, however, struggled to pass through the Senate.
PwC tax partner, Sandra Boswell, explained that even with the cap, the tax incentive remains vital to the future of research and development in Australia. In the legislation, the priority is to make sure the cuts are fair and equitable, but the tax incentive provides ongoing support for R&D that is crucial to Australian jobs and innovation, Boswell said. A problem arises when companies who are close to that $100 million cap take their projects overseas to other jurisdictions that have similar support without a cap.
KPMG’s head of R&D, David Gelb explained the changes will bring the pharmaceutical and manufacturing industries into the mix of companies facing limited R&D tax concessions and these companies are the ones employing a lot of people in the research field. This will cause discrimination against Australian companies as there will be foreign companies receiving their full entitlements for R&D tax concessions. As Australian companies move into next years budgets they will have no choice but to take their R&D offshore where there are better incentives, Gelb said.
Treasurer Joe Hockey and Finance Minister Mathias Cormann released a joint statement explaining the expected saving of $1.35 billion through these reforms. Hockey and Cormann stated fewer than 25 companies will see the effects of these changes and the vast majority of companies claiming the R&D tax incentive will remain unaffected. The introduction of the R&D expenditure cap of $100 million secures an improvement to the budget bottom line.
Many business groups aren’t so convinced. Australian Industry Group Chief Executive, Innes Willox stated businesses will spend less on R&D, making less of a contribution to Australia’s research infrastructure and research networks under reforms. The measure is all the more perplexing because the biggest direct impacts will be felt by organisations undertaking applied and commercial R&D. In contrast, other current policy directions are focused on lifting commercial-related R&D. We should be encouraging innovation and improving Australia’s long-term prosperity instead of providing disincentives for businesses and industry to work with researchers.
Greens MP Adam Bandt said cutting R&D support was a short-sighted way to balance the budget. Large companies contract out their research to smaller businesses and public institutions, so removing the tax breaks will be felt across the board. It will help drive the country’s investment in research and innovation to a 30-year low, said Bandt.
