Review recommends reform of R&D Tax Incentive

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The review of the R&D Tax Incentive has found the program falls short of meeting its stated objective of ‘additionality’ and ‘spillovers’, recommending a series of changes including the introduction of a premium designed to address Australia's poor record on collaboration and commercialisation.

The review was commissioned in early 2015 by former treasurer Joe Hockey. Late last year it was re-announced as part of the Turnbull government's National Innovation and Science Agenda.

The Review was conducted by Mr Bill Ferris AC, Chair of Innovation Science Australia, Dr Alan Finkel AO FTSE, Chief Scientist of Australia, and Mr John Fraser, Secretary to the Treasury.

The R&D Tax Incentive is one of the most popular and highly regarded policy programs supporting innovation. Almost 14,000 entities invest $20 billion annually in R&D, claiming around $3 billion every year under the program.

The Review report was released within days of the Turnbull government securing parliamentary support for a $600 million cut in claims under the popular program.

According to the Review report, "...the programme falls short of meeting its stated objectives of additionality and spillovers. There are a number of areas where improvements could be sought in order to improve the effectiveness and integrity of the programme and achieve a stronger focus on additionality."

Amongst six recommendations, the panel suggests tightening the program definition of R&D as a way to ensure spending is directed towards 'spillover' and 'additionality'.

A key recommendation is the proposed introduction of a 20 per cent collaboration premium. It says the premium should be directed towards creating an incentive for organisations engaged in R&D to employ science, technology, engineering and mathematics (STEM) PhD graduates, pointing to Australia's poor international performance on this issue.

Innovation minister Greg Hunt said the recommendation was about supporting collaboration that would help address the fact Australia's excellent performance in generating ideas is not backed by its ability to commercialise them.

The panel also recommends a $2 million annual cap on cash claims under the program, with the remaining share treated as a non-refundable tax offset carried forward for use against future taxable income. The cash based refundable tax offset is the fastest growing component of spending under the program.

According to the panel, the change would help ensure the program's financial sustainability while not impacting start-ups and small-to-medium enterprises.

In a move designed to encourage investment by large organisations, the panel recommends the introduction of an intensity threshold.

"With such a requirement, only companies directing a specified percentage of their total business expenses to R&D would begin to receive the non-refundable tax offset. This reflects that firstly, the literature suggests that spillovers are more likely to flow from R&D in large companies that exhibit higher R&D intensities and secondly, at least such a level of expenditure would be expected as business as usual in a truly innovative company," it says.

Complementing this recommendation, the panel proposes doubling the $100 million expenditure threshold introduced last year - a change that has led some large companies to publicly anticipate moving R&D offshore.

"The expenditure threshold has effectively locked-in a maximum annual $10 million tax benefit to around 25 large and very large companies that undertake more than $100 million in R&D, removing their incentive to undertake additional R&D in Australia. An intensity threshold would remove or substantially reduce the business as usual claims of some large and very large companies, while increasing the expenditure threshold would make the full benefits of the Incentive available for additional R&D by the remaining (R&D-intensive) companies," it says.

Other recommendations focus on improving administration of the program and reducing the cost of compliance for organisations.

A public consultation process is now underway that will run until 28 October.