R&D Tax reform to unfairly hit biotech startups


Despite the welcome protection of clinical trials in the R&D Tax Incentive (RDTI) reform package, biotech start-ups will be unexpectedly hit with a 2.5 percent loss of refund.  

A new calculation method of the RDTI benefit will see start-up biotechs with turnover under $10 million and in tax loss, lose a much-needed portion of their cash refund.  Eligible expenditure, previously resulting in a 43.5 percent claim, will now be eligible for only a 41 percent refund. For each $1 million of expenditure, the loss will be $25,000.

CEO of AusBiotech, Lorraine Chiroiu, said: “This is a critical blow for start-up and spin-out companies commercialising medical research that has typically come from our medical research institutes and universities.” 

“These vulnerable enterprises developing new therapies, devices, vaccines and diagnostics rely on a unique business model where they need intensive and large cash amounts to fund pre-clinical and clinical trials to reach regulatory approval and patients.”  

“We urge the Government to consider the potential damage that will be caused to this burgeoning sector and the negative impact on its work in early clinical and pre-clinical trials, if this legislation pushes ahead in its current form.”

The Federal Government announced the reform package in the May 2018 Federal Budget to respond to the Review of the R&D Tax Incentive 2016 (Ferris, Finkel, Fraser) and the draft legislation is currently open for consultation.

The mechanics of the new calculation of the benefit will now be in two separate parts - the corporate tax rate added to a benefit.

The refundable component of the RDTI will be 13.5 percent and the corporate tax rate for most companies is 30 percent – adding to a 43.5 claim. However, last year’s introduction of a phased drop in corporate tax rates means that companies with under $10 million turnover have reduced corporate tax rate of 27.5 percent. This is of no benefit to companies that do not yet pay tax as they have no revenue, like smaller andmedium-sizedd biotech companies. Therefore, we have a perverse situation where companies are disadvantaged in exchange for a benefit they do not have access to.   

The RDTI has been hugely successful in helping accelerate commercialisation of medical research and attracting pivotal investment funds and fostering a strong Australian medical technology, pharmaceutical and life sciences R&D sector, which underpins better health outcomes for Australians, encourages long-term investment that creates highly-skilled jobs, attracts clinical research and grows the economy.

Larger companies in the sector are grappling with the impacts of a new intensity measure that will see a reduction in support for most, a significant layer of complexity and uncertainty about eligibility added.

AusBiotech has repeatedly noted that despite claims of cost blow-out made in the Review of the R&D Tax Incentive 2016 there is no problem for government to solve. Costs are overstated by $0.5 billion to $1 billion and the latest figures show a drop in the expected cost of R&D Tax Incentive of $128 million in 2017 and $698 million over the Budget's forward estimates.

In contrast, the 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. This is clearly not the time to hit vulnerable companies.

The ‘savings’ that government believes it will capture by reducing claims will in fact only result in a small portion saved, as the impact of dividend imputation and the tax treatment of commercialisation revenues, for example, that operate outside of the RDTI effectively claw back this support. The RDTI will always be only a timing difference by pure design, moving the point of support earlier in a company’s cycle.

“The critical benefit of the program is the timing and up-front cash-flow benefit of the refundable component, when companies in loss have their highest costs (that of R&D), and this is the time that start-ups are at their most vulnerable,” said Ms Chiroiu.