Cuts dressed as integrity: a haphazard approach to funding innovation

Transcription

1 Cuts dressed as integrity: a haphazard apprach t funding innvatin Last night s Budget cntains inexplicable cuts t the R&D Tax Incentive prgram, which cmbined with ther key Budget measures will have a negative impact n Australia s innvatin ecsystem. Hwever, there is a sleeper hidden in the Budget papers that prvides insight int the reasns why this has happened. In the Budget papers, it is nted that the Gvernment will prvide $1 millin ver tw years t supprt a review f existing dmestic and internatinal measures f innvatin, which will infrm the develpment f new metrics that will ensure innvatin is accurately measured in Australia, t guide evidence based plicy and better target investments in innvatin as a driver f ecnmic grwth. What this tells us is that the Gvernment desn t currently have the evidence it needs regarding measures that drive innvatin infrming its plicies n innvatin. Withut such evidence, what we are left with is a piecemeal apprach that desn t deliver n any stated plicy bjective, but des deliver savings t the Budget thrugh cuts t the R&D Tax Incentive. Over the past 6 years, the Federal Gvernment has changed its R&D Tax prgram three times (including last night s Budget annuncement) and has cmmissined three significant reprts int the Australian innvatin system (including the recently annunced review f innvatin measures). Yet despite this, the Gvernment is still unable t develp and deliver a chesive innvatin plicy, instead defaulting t cuts t prgrams that supprt innvatin. This budget is n different. And the review f dmestic and internatinal measures prvided fr in this budget is nly ging t add even mre cmplexity t what is quickly becming a very cmplex area. This is a disappinting Budget, because it has intrduced mre uncertainty in an already unpredictable and uncertain area f Australia s ecnmy. Here are the tp five innvatin take aways frm the Budget 1. Purpse f intensity lst in the cmplexity In the lead up t the Budget, Treasurer Mrrisn indicated he wanted an R&D prgram that encuraged mre cmpanies t increase their R&D intensity and undertake additinal R&D activities. In an effrt t deliver n this bjective, ne f the key refrms prpsed in last night s Budget is the intrductin f an R&D prgram, whereby the mre that larger cmpanies spend n R&D (as a percentage f verall spend) the greater the benefit they receive under the prpsed new R&D prgram. In supprting this apprach, the Gvernment referred t the 2016 Review f the R&D Tax Incentive (The Triple F Review) and its finding that cmpanies with a higher intensity f R&D spend prvided the greatest benefits t the Australian ecnmy. In nting this recmmendatin, the Gvernment appears t have invlved a cherry picking apprach t infrmatin, as the uncited and unreferenced sentence included in The Triple F Review was that the literature suggests that spillvers are mre likely t flw frm R&D in large cmpanies that exhibit higher R&D intensities. T achieve this utcme, The Triple F Review recmmended the adptin f an intensity test f between 1-2% f ttal expenditure. Cuts dressed as integrity: a haphazard apprach t funding innvatin 8 May

2 What has been annunced in the Budget is the fllwing: A claimant s R&D ffset amunt will be its tax rate fr the year, plus: R&D Tax Incentive Rate Level f intensity (eligible R&D expenditure as a percentage f ttal expenditure) 4% 0% - 2% 6.5% >2% - 5% 9% >5% - 10% 12.5% >10% If the aim f this intensity test is t encurage cmpanies t spend mre n R&D, the uncertainty f the prpsed tiered apprach will have the ppsite effect. The ability t receive any specific benefit under the prpsed tiered intensity test is entirely dependent upn the cmpany s expenditure ttal and its R&D expenditure. If the cmpany s ttal budgeted expenditure were t increase during the year, it has an adverse impact n its ability t access the higher benefit, even thugh it may have expected the higher benefit based n prjected R&D expenditure. Adding t the uncertainty is the fact that all these calculatins are nly able t be made after the end f the year, raising the questin arund hw this can incentivise a cmpany t spend mre n R&D if it desn t knw its level f R&D benefit until after year end? This uncertainty, cupled with the insignificant nature f the increased tax benefit ffered at the tp rate f benefit (and the additinal expenditure required t access this tp benefit) raises serius dubts as t the effectiveness f this prpsed tiered apprach in terms f achieving the Gvernment s bjective f encuraging mre cmpanies t increase their R&D intensity. Many large cmpanies will have just cmpleted their FY17 tax return, where the R&D tax prgram ffered an 8.5 percentage pints ffset. In their FY16 tax return, the same cmpanies received a 10 percentage pints ffset (which was apprximately the same time the Gvernment started talking up the imprtance f innvatin). Under the prpsed changes, the majrity f cmpanies are nly likely t access a benefit f between 4 r 6.5 percentage pints, significantly lwer than histrical benefits and lwer than mst OECD cuntries. In essence, the prpsed intensity test primarily delivers savings t the Gvernment withut delivering n a structured innvatin plicy utcme. In fact, fr a cmpany t achieve the same benefit it currently receives (8.5 percentage pints) it wuld need t have an R&D intensity f 13.1%, r an R&D intensity f 21% t achieve the same net financial benefit it received fr ldging its FY16 R&D claim. In its glbal Innvatin 1000 publicatin, glbal strategy cnsulting firm Strategy& lists the R&D expenditure, the revenue and the R&D intensity f the 1000 largest glbal crprate R&D spenders (Amazn, Intel, Ggle, Samsung, etc). Of the tp 25 cmpanies, nly 6 have an R&D intensity abve 21%. As such, 19 f the wrld s largest 25 cmpanies (in terms f R&D spend) wuld be significantly disadvantaged if they were cnducting the R&D activities in Australia, cmpared t the current R&D Tax Incentive prgram and the R&D incentives ffered by ther develped cuntries. These statistics alne raise cncerns as t the impact such an inexplicable plicy change will have n attracting and retaining innvative cmpanies in Australia. We fully supprt the Gvernment gal f encuraging mre cmpanies t increase their R&D intensity and undertake additinal R&D activities hwever, an R&D prgram aimed at driving innvatin and additinal spend n R&D activities needs t be predictable in terms f access and f a level that mtivates innvative cmpanies t spend mre n R&D activities. Unfrtunately, last night s Budget annuncement has missed bth targets. Cuts dressed as integrity: a haphazard apprach t funding innvatin 8 May

3 2. SME rate cut; $4M cap t cash refunds Despite significant lbbying frm the SME sectr, the R&D tax incentive rate fr SMEs (thse with an aggregated turnver f less than $20 millin p.a.) will be cut t 41% frm the 2018/19 year nwards. This is effectively a cut frm the previus marginal net benefit f 16% dwn t 13.5%, with limited time t cnsider the impact f such a dramatic change, given the prpsed 2018/19 start date. Methd Marginal net benefit Old 43.5% R&D tax rate 27.5% crprate tax rate 16% New 27.5% crprate tax rate % R&D tax rate 13.5% Fr thse SMEs in tax lsses, there were even mre significant changes, with a prpsed $4 millin p.a. cap n cash refunds frm the R&D Tax Offset. Whilst there s n cap n the ttal R&D Tax Offset available (which was recmmended in The Review) the cash refund is capped with the balance t be carried frward as a nnrefundable R&D tax ffset. In these situatins, the cmpany will need t wait until it is paying tax befre it can realise the benefit carried frward. Cmpanies engaging in clinical trials typically have refunds in excess f $4 millin. Expenditure n clinical trials will nt cunt twards the cap. It is interesting t nte that n ther activities r industries will be exempt frm the refundable cap. 3. Missed pprtunity t restre the EMDG Prgram The expected gd news fr Australian exprters did nt arrive in last night s Federal budget, with n increase t the Exprt Market Develpment Grant (EMDG) prgram funding annunced. This is despite the specific recmmendatin fr increased funding recently annunced in the Innvatin and Science Australia (ISA) Bard in their Australia 2030: prsperity thrugh innvatin paper. The 7 th recmmendatin f the Australia 2030 Reprt was t increase the Gvernment s effrts t help yung Australian businesses and SME s access exprt markets by increasing funding t the EMDG prgram. The 2018 Budget didn t deliver this, and SME exprters are left wndering abut the future f the EMDG prgram. Over the past three years, the EMDG prgram has suffered a significant ersin in value, with Austrade estimating a 50% shrtfall in the secnd tranche payment in 2018 (up frm 34% in 2017). Given that SMEs are currently unable t predict the level f EMDG rebate available t them (due t increasing claimants and a finite grant pl) this lack f predictability is acting t discurage SME spending n exprt related marketing activities, t the detriment f the Australian ecnmy. In delivering his Budget speech, Treasure Mrrisn nted that we live in a cmpetitive wrld and if we make the wrng mve, ther cuntries might cut ur lunch. This is already happening under the current underfunded EMDG prgram, with Canada utperfrming Australia in manufacturing exprts by a factr f fur, capturing 2.4% f the glbal manufacturing exprt market. 1 Withut the anticipated funding injectin t restre the supprt that the EMDG prgram prvides exprters, Australia shuld expect ther cuntries t step up and take the exprt pprtunities we are leaving n the table. 1 United Natins 2017 UN Cmtrade, UN Statistics Divisin, New Yrk Cuts dressed as integrity: a haphazard apprach t funding innvatin 8 May

4 4. Lking t clse mre transfer pricing lphles While last night s Budget did nt annunce any big ticket refrms f Australia s transfer pricing legislatin delivered in previus Budgets, it did recgnise the need t clse dwn lphles assciated with multinatinal digital and technlgy cmpanies that have a significant ecnmic presence in Australia, but are nt cntributing t tax revenues. The Gvernment indicates that it is cmmitted t ensuring that digital businesses pay their fair share f tax in Australia and ges n t nte that it is actively engaging with the OECD in explring ptins fr taking the digital ecnmy. The Gvernment als nted it will shrtly be cnsulting n recent internatinal develpments and hw digital businesses are taxed in Australia. The utcme f such a cnsultatin prcess, which Glasshuse Advisry wuld encurage clients t be part f, is likely t make an appearance in next year s Budget. 5. Plicy n the run - ther innvatin related Budget measures In additin t sme majr changes t a number f innvatin related prgrams, there are several ther revenue and expenditure measures targeted twards Australian innvatin. These include: A raft f measures that are aimed at mitigating perceived rrting f the R&D Tax Incentive prgram: Mre resurcing t the ATO and AusIndustry t increase enfrcement, cmpliance and administrative activities. New measures t allw the ATO t publicly disclse claimant details and their respective levels f R&D expenditure. Limiting extensins f time typically granted t cmplete R&D registratins after the ldgement deadline. Amendments t technical prvisins f the R&D Tax Incentive such as the feedstck and clawback rules. It will be interesting t see hw these measures cntribute t the prjected net gain in revenue f $2.4 billin ver the frward estimates. We will prvide further infrmatin n these new integrity measures and the impact that they will have n R&D claimants as mre detail cmes t light. An increase t the upper limit n R&D expenditure that can receive a benefit frm $100 millin t $150 millin p.a. This is cnsistent with a cmment in The Triple F Review that an increase t the cap shuld be cnsidered in cnjunctin with the intrductin f an intensity measure. While the idea is therefre familiar, there is n evidence as t hw a 50% increase in the cap, cupled with the intensity threshlds, better targets Gvernment funding tward innvatin beynd business-as-usual. As well as excluding clinical trial expenditure frm the cap n R&D tax refunds, the Gvernment allcated $248 millin fr the supprt f clinical trials, as part f its brader $1.3 billin Natinal Health and Medical Industry Grwth plan. The Gvernment has a clear plicy t encurage clinical trial activity in Australia and we will clsely mnitr the details f this funding t determine hw it interacts with the R&D Tax Incentive, and hw t maximise the supprt available t cmpanies innvating in this space. Cuts dressed as integrity: a haphazard apprach t funding innvatin 8 May

5 The Gvernment will prvide $600,000 t fund a business case t mdernise IP Australia s patent management system and streamline access t its services. The measure is designed t help Australian businesses mre easily prtect their intellectual prperty. While prviding incentives t de-risk R&D is an imprtant cntributr t the innvatin cycle, its equally imprtant that businesses are able t prtect and explit the results f this R&D frm Australia. We welcme any attempts t streamline these prtectin and explitatin prcesses. The Gvernment s measures als cntinue t extend the ability f small businesses (thse with an annual turnver f less than $10 millin) t immediately deduct eligible assets, up t the value f $20,000, until 30 June The purchase r acquisitin f an asset is nt eligible fr a ntinal deductin under the R&D tax prgram, hwever the asset s depreciatin is. As such, the utilisatin f the gvernment s instant asset write-ff scheme affrds small business the ability t access a significant cashflw benefit if purchasing the asset can be incrprated as part f a refundable R&D tax ffset claim. T discuss ur budget respnse r t learn mre abut funding pprtunities, cntact ur R&D tax experts. Cuts dressed as integrity: a haphazard apprach t funding innvatin 8 May