Tax change ‘may cost Australia R&D investment’

Thousands of Australian companies have been hit with the lowest research and development tax offset rate in years.

Cochlear chief executive Dig Howitt. Picture: Ryan Osland

Thousands of Australian companies have been hit with the lowest research and development tax offset rate since the measure was introduced, in a move by the Turnbull government to “crack down” on the incentive.

Treasurer Scott Morrison revealed in Tuesday’s budget that reform of the R&D tax incentive would save the government $2.4 billion over four years.

The reforms included a cut to the R&D tax offset rate, which for companies with an annual turnover of less than $20m was expected to have a limited impact. But for businesses with an annual turnover above $20m, the hit was tipped to be significant.

Companies in agribusiness, food, packaging and industrial products would all be affected.

KPMG national partner David Gelb said the offset rate had never been as low as it would now be since it was introduced 33 years ago.

He argued that the majority of the 3000-plus companies in the $20m-plus cohort would have their R&D claims reduced by more than 50 per cent.

“In global comparative terms that will reduce Australia to be effectively uncompetitive in that space,” he said.

Mr Gelb said there appeared to be no strategic reason to implement the reforms, adding that it was an austerity measure to reduce the cost because the program had run out of control among companies that were pre-revenue.

“It is unfortunate that Australia’s destination as an R&D location will be relegated to a level where it may lose out on R&D investments,” he said.

Mr Morrison said on Tuesday that the government was “cracking down” to ensure that R&D tax incentives were used for their proper purpose. The government also argued that the measures supported additional R&D rather than “business-as-usual” activities.

A 2016 review of the R&D tax incentive by Innovation Australia chairman Bill Ferris, chief scientist Alan Finkel and Treasury secretary John Fraser found that the incentive did not fully meet its stated policy objectives.

Jamie Munday, EY’s national R&D leader, said that as global countries began to reduce corporate rates, R&D incentives were being introduced or expanded as a lever to retain and attract investment and jobs.

“It’s the very companies that we want to innovate in the old economy, including but not limited to, mining, manufacturing, fast-moving consumer goods and agriculture, that will be impacted most by the announced R&D changes,” he said.

“These companies are being told to innovate and encouraged to do things differently, and at the same time the government has announced that it will significantly reduce the only material incentive for them to do things differently.”

There were some winners in the reforms, including Australia’s largest biotechs. The government announced that from July 1, it would increase the $100m R&D expenditure threshold to $150m, ­allowing larger companies to continue to be rewarded for additional R&D they undertake as they grow.

Dig Howitt, chief executive of Cochlear, backed the reforms, adding that increasing the cap on expenditure to $150m per year would allow Cochlear to increase eligible R&D by 50 per cent over the coming years, with most of that in Australia rather than offshore.

“This means more high-paying R&D jobs in Australia and more valuable intellectual property held here,” he said.