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Budget 2019 – review of R&D Tax changes

May 14, 2018 by Ben Thompson

The Budget for FY19 titled changes to the R&D Tax Incentive, “Protecting the integrity of the tax system”. On closer review of its implications I would suggest a more apt title being “Shaving more dollars on innovation in Australia”.

The Budget announcement included a sneaky bait-and-switch with the focus on policing efforts and carefully worded reductions.

The government highlighted, the cost of the R&D Tax Incentive “…was expected to be $1.8 billion per annum when it was introduced in 2011-12; in 2016-17 it cost around $3 billion”. The latest changes in the Budget aims for “…a net gain to the budget of around $2 billion over the forward estimates period”.

An optimist could view the higher than expected uptake of the programme as a brilliant success which encouraged more R&D to be conducted by Australia by smarter people. Unfortunately the Government, rather than look at the entire ecosystem with which they support innovation, has chosen the easy route – namely taking from the little guys, to give more to the mega-big, with fear mongering and the risk of increased compliance put in place to push people away from applying and/or reduce the activities and expenses claimed.

The key announcements which impact 99% of our clients, namely companies with <$20M turnover, are that they are scrapping talk of 43.5% refundable tax offsets (apples) and in its place from 1 July 2018 onwards are talking about 13.5 percentage points above the applicable company tax rate (oranges). This flipping of vernacular passed under the radar of most of the commentariat (honourable mention to AFR) yet has real-world impact of further reducing the R&D rate of benefit by 2.5% from FY17-18, which itself is already a 1.5% reduction from FY16. Whilst rates of R&D benefit are being reduced for small/medium businesses the government is increasing the benefit for the mega-large, with an intensity measure of R&D with a sliding scale of benefit which gives an overall increase of R&D rates compared to previous years.

Putting aside the ongoing reduction of the rate of R&D benefit for SME – other key announcements in the Budget of direct relevance to our client base were that additional funds are being earmarked for increased compliance activities on the side of the government, inclusive of AusIndustry being authorised to produce binding guidance on what constitutes eligible R&D via public findings akin to those produced by the ATO.

Increased compliance activities should not impact any of our work as we consciously hold the bar for eligibility at least as high as the government. Our technical background and robust understanding of legislation, in combination with your internal contemporaneous evidence of testing, is our insurance policy if there is ever a knock at the door. It is imperative, now more than ever, for constant improvement of documentation processes – both to ensure compliance and to streamline future claims and protect against loss of IP.

The Budget also announced that claimants of the R&D Tax Incentive will now have their names and the amount of expenditure claimed published to improve public accountability. It is wishful thinking that the Government, policy makers and lobbyists were equally held to same level of account.

Source info: https://www.budget.gov.au/2018-19/content/factsheets/6-tax-integrity.html