SHOULD YOUR BUSINESS BE MAKING A SUBMISSION TO THE SENATE INQUIRY INTO CHANGES INTO THE R&D TAX INCENTIVE?

During the most recent parliamentary sitting fortnight, the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019, which outlines the Government’s proposed changes to the Research and Development (R&D) Tax Incentive, was referred to the Senate Economics Legislation Committee.

The Committee is currently accepting submissions from stakeholders until the Friday, 6 March 2020 with the Committee expected to table their report on Thursday, 30 April 2020.

Currently many businesses and higher education institutions undertake R&D within Australia, with the gross expenditure on research and development estimated to be worth over $33 billion.

This means that large scale changes to the current tax incentives for R&D activities could disincentivise the continuing growth in expenditure and may see R&D activities taken offshore.

Here are the notable changes being proposed to the R&D Tax Incentive.

INCREASING THE EXPENDITURE THRESHOLD

One of the key changes to the R&D Tax Incentive is the increase in the R&D expenditure threshold from $100 million to $150 million, and expenditure over $150 million will not receive the offset premium and instead their expenditure will be offset at the relevant company tax rate.

Refunds of expenditure up to $150 million will also be changed, with a move from a flat rate of 43.5% to a variable rate of 13.5% above the claiming company’s tax rate. Should this Bill pass, the refundable tax rate will be 41%, which is due to the previously passed reductions in the corporate tax rate.

The Bill also proposes the removal of the flat rate non-refundable tax offset rate and introducing a ‘intensity’ scale which will be dependent on what percentage of the relevant company’s expenses go to R&D. Each of the intensity scales correspond to a percentage. This is then added to the company’s relevant tax rate and represents what percentage of their R&D expenditure will be eligible for the offset but not refunded.

INTRODUCING A NEW CAP FOR SMALL AND MEDIUM ENTERPRISES (SMEs) UNDERTAKING R&D

The proposed bill also introduces the notion of a $4 million cap on the R&D tax incentive for business with revenue less than $20 million.

These SMEs will also be captured under the reduction of the refundable tax offset, which means that these businesses will also receive a cash refund of 13.5% premium on top of the company’s relevant tax rate.

It is worth noting that clinical trial activities undertaken by SMEs will not be subject to the $4 million cap, which was previously welcomed by relevant stakeholders during the Senate Inquiry which took place in the 45^th Parliament.

A LEGAL DEFINITION FOR CLINICAL TRIAL ACTIVITIES

The other key change is the introduction of a new legal definition for clinical trials with regards to the $4 million exemption.

The Bill proposes the following definition:

A clinical trial is a planned study of the safety or efficacy in humans of an intervention (including a medicine, vaccine, treatment, diagnostic procedure or medical device) with the aim of achieving at least one of the following:

• the discovery, or verification, of clinical, pharmacological or pharmacodynamic effects;
• the identification of adverse reactions or adverse effects;
• the study of absorption, distribution, metabolism or excretion.

Stakeholders during the Inquiry in the previous Parliament raised issues with the definition, stating that its wording could possibly exclude R&D costs incurred that were directly related to clinical trials but not captured under the definition outlined.

WILL YOUR BUSINESS BE AFFECTED?

The effect of the proposed changes to the R&D Tax Incentive will heavily depend on the size of your business and your level of R&D expenditure.

For larger companies, intrinsically linking the corporate tax rate to the R&D Tax Incentive may see these companies scale back their R&D expenditure. This is because both the refundable and non-refundable offset rate will reduce over the next three in line with the Government’s previously passed legislation which will see a reduction in the corporate tax rate from 30% to 25%.

The proposed $4 million refund cap for SMEs is more generous than the previously proposed changes in the 2016 Budget, which proposed a maximum refund benefit of $2 million. However,  despite this, the introduction of a cap at all may still cause small and medium enterprises to reduce their R&D activity to ensure that their costs do not exceed the amount for which they can receive the maximum refund benefit.

In addition, for a business to reach the proposed $4 million cap, a business would have to spend more than $10 million on eligible R&D activities. This would mean that any start up would have to be spending over half of their revenue on R&D activities.

SHOULD YOUR BUSINESS BE MAKING A SUBMISSION?

Should any of these changes affect your business, we would recommend making a submission to the inquiry. Submissions close on 6 March 2020.

At Nexus Public Affairs, we have guided many of our clients through the process of formulating effective submissions to Government. We understand the complexities of the political landscape and have the relationships with key stakeholders to ensure that your submission achieves the objectives of your organisation and aligns with the Government’s priorities.

If your business or organisation requires any assistance in formulating a submission in response to the Morrison Government’s proposed R&D Tax Incentive changes, or if you require a wider public affairs strategy, please don’t hesitate to contact Sarah Cullens from the Nexus team.