Budget Review 2020–21 Index
Economic Policy
Budget
Measures: Budget Paper No. 2: 2020–21 includes a measure to amend
Australia’s research
and development (R&D) tax incentive (pp.19-20). The announcement is
significant and reflects a shift in the Government’s R&D tax incentive
policy, particularly when compared with the controversial Treasury
Laws Amendment (Research and Development Tax Incentive) Bill 2019 (the 2019
R&D Bill), which was a response to a Government-initiated Review
of the R&D Tax Incentive (2016). The 2019 R&D Bill sought to
make the R&D tax incentive more targeted and efficient (see, Bills
Digest, pp. 14-19), however the Bill was
not well-supported by industry and was described by some as a budget savings
measure.
This measure is one
of several in the Budget making up the JobMaker plan that aims to support a business-led
economic recovery. Others include the Modern
Manufacturing Strategy, investments in energy, and a general
business tax package (including immediate expensing of asset purchases and
loss carry-back rules). The measure was included in the Treasury
Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020,
which received Royal Assent on 14 October 2020. The changes to the R&D tax
incentive come into force for income years start on or after 1 July 2021.
What is the R&D tax incentive?
The R&D tax incentive provides a tax offset to companies
that invest in eligible research and development activities (see Bills
Digest to the 2019 R&D Bill (the ‘Bills Digest’), pp. 11–13). Prior to
the budget announcement, the tax offset applied to the first $100 million of eligible
R&D expenditure at the following rates:
- 43.5 per cent for small R&D entities (legislatively defined
as having annual turnover of less than $20 million) and
- 38.5 per cent for large R&D entities (legislatively defined
as having annual turnover of $20 million or more).
Further, the R&D tax incentive was fully
refundable for small R&D entities, while large R&D entities could carry
forward unused tax offsets to future income years. For example, if a small
R&D entity had eligible R&D expenditure of $1 million in 2019–20, it
would receive a tax offset of $435,000 (this is higher than the value of the
standard deduction amount of $275,000 at the company tax rate of 27.5 per
cent). If the entity had a tax liability of $300,000, the
R&D tax incentive would reduce tax payable to $0, and the entity would
receive a refund of the remaining $135,000.
Explainer: What is a tax offset?
- A tax offset will directly reduce the amount of an entity’s tax
payable. Unlike a tax deduction, it directly reduces or ‘offsets’ a taxpayer’s
tax payable.
- Tax offsets may be either refundable or non-refundable—where an
offset is refundable, any unused amount of offset will be returned, or paid
back, to the taxpayer.
-
See Australia Taxation Office, Offsets
and Rebates, and the Bills
Digest (pp. 9–10) for more information (including a history of the
R&D tax incentive).
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What is the rationale for R&D
tax incentives?
There is a well-established body of literature that
demonstrates that successful R&D and innovation policies can improve productivity,
maintain high wage jobs, and drive greater economic prosperity and living
standards. However, these policies are only likely to have a beneficial effect
where they modify business behaviours to generate additional R&D activity
that would not have occurred without the incentive, and lead to spill-overs for
other businesses and society more generally (see, Bills
Digest, pp. 6–7).
Although there has been a trend amongst OECD countries
to increase the availability, simplicity and generosity of R&D tax
incentives, there is a lack
of clear empirical evidence about their effectiveness in promoting new
R&D activity.
Budget announcement
In the Budget
speech, the Treasurer announced that the Government would provide ‘$2 billion in additional Research and
Development incentives—removing the cap on refunds, lifting the rate and
rewarding those businesses that invest the most’.
As can be seen in Tables 1, 2 and 3 below, this is not an
entirely accurate representation because:
- prior to the announcement, there was no cap on the refundability
of the R&D tax incentive for small R&D entities—although it should be
noted that the 2019 R&D Bill did propose a cap (meaning the Budget
announcement reversed the Government’s position on this issue) and
- businesses with between $20 million and $50 million
annual turnover and a tier one R&D intensity premium (see Table 2) will
have a lower R&D tax incentive rate in 2021 compared to 2022.
Explainer: R&D intensity
premium
In order to make the R&D tax
incentive more targeted, the Review of the R&D Tax Incentive
recommended linking the R&D tax incentive rate to a business’s level—or ‘intensity’—of
R&D. For the purposes of the 2019 R&D Bill and the budget
announcement, R&D intensity is broadly calculated by dividing the
business’s eligible Australian R&D expenditure by its total expenditure.
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Table 1: comparison of proposed
changes to the R&D tax incentive
Pre-existing
law
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Proposed law in 2019 R&D Bill
|
Budget announcement
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The
expenditure threshold
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$100 million
|
$150 million
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$150 million
|
R&D
tax offset for small R&D entities (aggregated turnover of less
than $20 million)
|
Generally
43.5%
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Corporate tax rate plus 13.5%
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Corporate tax rate plus 18.5%
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Fully
refundable
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Capped at $4 million per annum for small R&D
entities—but clinical trials would not count towards the $4 million cap
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Fully refundable
|
R&D
tax offset for large R&D entities (aggregated turnover of $20 million
or more)
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38.5%
and is non-refundable
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Corporate tax rate plus a premium based on incremental
R&D intensity (see Tables 2 and 3).
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Corporate tax rate plus a premium based on their incremental
R&D intensity. However, the premium is more simple and generous than
the 2019 Bill (see Table 2).
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Source: Bills digest, p. 17; Budget paper no. 2 (pp.19-20).
Table 2: R&D intensity premium
Proposed
law in 2019 R&D Bill
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Budget announcement
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R&D
intensity range
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R&D tax incentive rate
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R&D intensity range
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R&D tax incentive rate
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Notional
deductions representing up to and including 4% of total expenses
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Corporate tax rate plus 4.5%
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Notional deductions representing up to and including 2% of
total expenses
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Corporate tax rate plus 8.5%
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Notional
deductions representing greater than 4% and up to and including 9% of total
expenses
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Corporate tax rate plus 8.5%
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Notional deductions representing greater than 2% of total
expenses
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Corporate tax rate plus 16.5%
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Notional
deductions representing greater than 9% of total expenses
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Corporate tax rate plus 12.5%
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Source: Bills digest, p. 19; Budget paper no. 2 (pp.19-20).
Table 3: effect of R&D
intensity premium
Entity
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Current R&D tax incentive rate
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2021–22 R&D tax incentive rate
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Annual
turnover exceeding $50 million and a R&D intensity premium of
greater than 2%
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38.5%
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46.5%
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Annual
turnover exceeding $50 million and a R&D intensity premium of 2% or
less
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38.5%
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33.5%
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Annual
turnover of between $20 million and $50 million and a R&D
intensity premium of greater than 2%
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38.5%
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41.5%
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Annual
turnover of between $20 million and $50 million and a R&D
intensity premium of 2% or less
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38.5%
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38.5%
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Annual
turnover of less than $20 million
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43.5%
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43.5%
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Source: Bills digest, p. 19; Budget paper no. 2 (pp.19-20).
Conclusion
It is likely that as Australia continues to grapple with
COVID-19 and its longer term economic effects, R&D policy will continue to
be a key pillar of Australia’s economic policy.
As such, it is important to note three key issues that have
not been fully addressed by the budget measure, despite being raised by the Review
of the R&D Tax Incentive and by stakeholders in submissions to the Senate
Economics Legislation Committee in 2018
and 2019.
Firstly, the intensity premium has previously been criticised
for potentially encouraging the outsourcing of non-R&D activities such as
sales, administrative and marketing functions. In particular, stakeholders
commented that there may be an incentive for businesses to outsource
non-R&D activities to increase their R&D intensity level and access a far
more generous R&D tax incentive rate. If this were to occur on a large
scale, it could undermine the effectiveness of the R&D tax incentive as a
job creation measure due to a net negative level of jobs created through
outsourcing.
Secondly, the budget announcement only partially adopts the
recommendation of the Review of the R&D Tax Incentive to increase the upper
limit of the R&D expenditure threshold. While most stakeholders have
welcomed this amount increasing from $100 million to $150 million, others,
such as Cochlear, have previously stated that
the $150 million limit is the bare minimum required. In its 2018
submission to the Senate inquiry, Cochlear also drew attention to the fact
that many multinationals will make R&D location decisions based on
available incentives:
We have global R&D capability and other countries
regularly offer Cochlear incentives, over and above standard incentives, to
perform R&D outside Australia. With the $100M cap in place we are more
likely to place new R&D offshore, which will lead to IP moving offshore
which means more tax paid offshore and high paying R&D jobs being added
outside Australia.
Thirdly, the absence of a collaboration premium (which is
also absent from the 2019 R&D Bill) is likely to be a point of ongoing
contention and debate, especially in the higher education sector, given that it
was recommended by the Review of the R&D Tax Incentive. For a more detailed
discussion of this issue, see the Bills
Digest (p. 28).
Notwithstanding these issues, the budget announcement has
generally been well-received (see for example Manufacturing
Australia and Startup
Australia) even though it falls short of what industry and stakeholders
have been calling for since the Review of the R&D Tax Incentive was first
announced.
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