David Gelb, KPMG National Partner – R&D, comments on the R&D issues raised in the Innovation and Science Australia (ISA)’s report, Australia 2030 Prosperity through Innovation: A plan for Australia to thrive in the global innovation race.
For industry, the report contains a mixed bag of proposed initiatives which will benefit some companies and disadvantage others. For companies undertaking R&D activities, the following will be of interest:
1. Recommendation 6 (intensity threshold)
The introduction of a 1 percent intensity threshold for the R&D Tax Incentive. This is a modified version of the 1-2 percent intensity threshold proposed in the 2016 ISA review of the R&D Tax Incentive (the 3F Report). Importantly in the current report, once the threshold ‘trigger’ is reached, expenditure below the threshold amount attracts the R&D benefit, but it doesn’t include a proposal to increase the non-refundable cap from $100M to $200M. The ability to claim expenditure below the threshold once the trigger is reached is a welcome relief and necessary to make the R&D Tax Incentive workable for those able to access it, but it will still adversely impact thousands of companies that spend less than 1 percent of their total expenditure on R&D.
2. Recommendation 6 (refund cap)
The introduction of an annual cap on the refundable R&D tax offset of $4M and a lifetime cap of $40M. This goes further than the 3F Report recommendation which only proposed an annual cap and will be of greatest concern to high cost long term R&D such as that carried out in the medical and mining industries.
3. Recommendation 6 (CRCs, Industry Growth Centres)
The expansion of funding for Cooperative Research Centres (CRCs), CRC projects and Industry Growth Centres will be welcomed by industries which ISA consider have ‘competitive strength and strategic priority’ and not as much by those that may miss out as either too niche or not a strategic priority.
4. Recommendation 7 (export market)
Increased funding for the Export Market Development Grant (EMDG) program along with more trade missions and promotions will benefit small and medium enterprises (SMEs).
5. Recommendation 19 (collaboration premium)
The introduction of a collaboration premium (up to 20 percent) for expenditure on public research institutions as recommended in the 3F Report. It appears this would only be available to companies accessing the non-refundable R&D tax offset (i.e. those with an aggregated turnover of $20M or more) and it is unclear whether it would be accessible where the company fails the 1 percent intensity threshold.
These recommendations reflect a general trend to rebalance government support for industry toward more direct funding. Medium-sized companies in strategic industries that are spending significant amounts on R&D and collaborating with Australian researchers will benefit. Less fortunate will be larger companies or those with high operating costs (e.g. where the cost of goods sold will increase the total expenditure and artificially lower their R&D intensity percentage). Moreover, the medical and mining industries will be hard hit with some medical research companies likely to already be at the $40M lifetime cap.
KPMG believes the move to direct funding – a move which brings Australia more into line with international practice – represents a double-edged sword.
We also have concerns that the move to direct funding will lead to only a relatively limited number of grant applications being able to be reviewed and approved. The R&D Tax Incentive currently supports over 30,000 projects. Many of the Federal Government grant programs in the past have only approved around 200 projects per year – so unless more resources are added to administer the revised program, there is a danger that many projects will miss out on support.
We welcome ISA’s call to action and agree that Australia needs to invest more in innovation – across all sectors of the economy. We remain positive that if implemented properly and with sufficient industry consultation, the recommendations contained in the 2030 report will improve Australia’s innovation and science performance. We look forward to working with ISA and the Government on this further. But we remain concerned that some of the recommendations will result in many companies losing access to the R&D Tax Incentive.
The 117 page report, Australia 2030 Prosperity through Innovation: A plan for Australia to thrive in the global innovation race, contains 30 recommendations across five imperatives and a roadmap designed to improve Australia’s innovation and science performance by 2030.
Associate Director, KPMG
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