Why the Research & Development Tax Bill is stuck in reverse

How can the Government pass a Bill that reduces investment into Research & Development in Australia, which flies in the face of guidance offered by tax practitioners, industry bodies, and Australian companies that rely on the R&D Tax Incentive?

Pretty easily it seems.

The Govt has proposed to reduce the tax refund for SME’s. SME’s are the economic powerhouse in Australia’s economy. The Govt has taken a shot at the big end of town. This action has put Australian life sciences community under the microscope.

This is what has happened?

A reduction in the tax refund for SME’s.

The existing tax refund rate was 43.5%, the wisdom to reduce that belies every indicator in the modern world that investment in R&D pays dividends to the economy and society in the short and long term.

The big end of town also gets bitten with the introduction of an R&D intensity threshold. Leaving aside the administrative burden and technical ramifications associated with such a loosely defined test, the proposed R&D intensity threshold is set to tier R&D offset rates so as to minimise the R&D benefit available for large companies. Slowing down investment into R&D from the companies that can really afford it? Something is amiss with that thinking.

The revised bill continues to implement an annual cap on R&D tax offset refunds of $4m per year. Australia’s life sciences community is growing and Australia has become a premium destination for multinational firms that want to set up a company and hire Australian contract research organisations to conduct R&D onshore.

Australia’s current reduction in expenditure on R&D is a decade long trend. Is that where Australia, the lucky country, the clever country, should be positioned?

One area thought to escape the dark clouds of the revised R&D Tax Bill was ‘clinical trials’. Except, the narrow definition of a clinical trial in the revised bill. Most likely leaving the life sciences community scratching their collective heads over which part of an ordinary clinical trial would be included in the revised R&D Tax Bill.

The government has definitely gone it alone. Without any consideration in response to the bipartisan Senate Committee’s recommendations. Or tax practitioners’ advice or letters from industry bodies and Australian companies.

It looks as if the real beneficiaries of the revised R&D Tax Bill will be countries that value Research and Development. New Zealand is one such place.

This is a summary of a previously published article by Bridgepoint Group’s Innovation advisor, Alan Baghdasarayan. The link to the original article with more in-depth analysis is here.