Life sciences industry caught in cross-fire of R&D tax overhaul


AusBiotech is concerned the sector will be damaged in the ‘cross-fire’ if the Treasury pushes ahead with plans to cap the Research and Development (R&D) Tax Incentive (RDTI).

Treasurer Scott Morrison has publicly flagged an overhaul of the RDTI in the coming May Budget, which will seek to restore the “integrity of the program” after accusations of “mining of tax incentives” and “arbitrary use”.

AusBiotech CEO, Mr Glenn Cross says, “The RDTI has been critical to Australia’s success in attracting more investment for the commercialisation of medical research because it stretches our medical-research dollars further. By fostering a strong Australian medical technology, pharmaceutical (MTP) and life sciences R&D sector, we are encouraging the long-term investment in Australia that creates highly-skilled jobs, attracts clinical trials and grows the economy we need.”

The overhaul will include unwelcome and potentially damaging changes on the refundable components of the program: a $4 million annual cap; and a lifetime cap of $40 million.

“If the Government is concerned about misuse of the program, then why not clamp down on misuse and preserve the policy intent? How is capping the program a rational solution?” said Mr Cross. “This cap is going to wind back the five percent annual growth Australia is achieving in clinical trials and the related jobs that we have seen in Australia since the scheme began.”

Seventeen percent of ASX-listed MTP companies that claim the refundable component will be affected immediately, with potential flow-on limitations to their R&D programs, and another nine percent are in the danger zone.  

If the Federal Government insists on a $4 million annual cap, the MTP sector should be carved out for protection, as measures to limit the R&D Tax Incentive will inequitably harm MTP-based research and development - which makes up only about eight percent of claims under the RDTI and has a record of compliance with the rules.

The Government has recognised the MTP industry as one of Australia’s strongest and most competitive sectors. The industry’s contribution to GDP is already significant and growing with the potential for significant contribution.

The critical benefit of the RDTI is the timing and up-front cash-flow benefit of the refundable component, when companies in tax-loss have their highest costs (that of R&D). The immediate benefit to the Australian economy is increased high-skilled jobs and technology value creation - and later, commercialisation revenues return further benefit.

Relative to most other sectors, the timeline to commercialisation of medicines and vaccines is long (on average 10 - 15 years) and very expensive (average $1.5 billion – $2.2 billion per approval) with significant scientific and regulatory hurdles to reach market (patients). A $40 million lifetime cap will disadvantage companies developing these life-saving and life-changing technologies.

The ABS recently reported that annual Australian R&D expenditure by businesses declined by more than $2 billion (12 percent) per annum between 2013/14 and 2015/16 (the latest period for which data is available). It is now at levels not seen since the global financial crisis.  

The life sciences sector is bucking this trend in most part due to the RDTI and clearly demonstrating the success of the policy intent of the program and the National Innovation and Science Agenda. Why threaten this success?