Industry body labels Australia's R&D tax incentive Bill as 'unduly diluted'

The AIIA has argued the Bill could see Australian-based IT companies send R&D activities overseas or abandon them altogether.

The Australian Information Industry Association (AIIA) is concerned that the nation's pending research and development (R&D) laws will affect local businesses, instead of protecting them from multinationals that may take advantage of the scheme.

"The AIIA is concerned that the proposed amendment to the Research and Development Tax Incentive scheme, which has provided tangible incentives to Australian companies to pursue R&D activities, is being unduly diluted," the not-for-profit advocacy group has said.

"Such an action will compel Australian-based ICT companies to either outsource R&D activities to overseas markets, adversely affecting Australian employment opportunities, or abandon R&D activities in their entirety."

In a submission [PDF] to the Senate Standing Committee on Economics and its probe into the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019, the AIIA has argued the concerns of the Australian IT sector have not been addressed.

Senate Economics Legislation Committee in February last year asked the Bill be taken back to the drawing board, saying at the time it recognised the need for government to maintain public confidence in the integrity and financial sustainability of the R&D tax incentive, but that it was not confident the introduced measures would provide exactly that.

The Bill remains mostly unchanged, with minor tweaks to premium offsets.

If passed, it would permanently increase the R&D expenditure threshold from AU$100 million to AU$150 million; link the R&D tax offset for refundable R&D tax offset claimants to their corporate tax rates, plus a 13.5 percentage point premium; cap the refundability of the R&D tax offset at AU$4 million per annum; and increase the targeting of the R&D tax incentive to larger R&D entities with high levels of R&D intensity.

"The Bill in its current format fails to address the concerns outlined in the recommendations arising from the Senate Economics Legislation Committee report … this reappraisal has yet to take place, and as such the broader concerns of both the Senate Economics Legislation Committee and Australian ICT sector have not been addressed in this proposed draft," the AIIA wrote.

While the AIIA said the aim of the Bill is intended to target larger multinationals, it said those who will be most affected by the proposed regime will be Australian enterprises, who represent a majority of applicants for the R&D Tax Incentive scheme.

"At present, 80% of claimants are Australian companies with an annual income of less than AU$20 million," it added.

As a result, the AIIA has made a handful of recommendations, including that the current thresholds be raised in line with the new tax rates for small to medium-sized enterprises (SMEs); that the rate for large business are in line with the current tax rate of 38.5%; that the rate for SMEs remain unlinked and at the current tax rate of 43.5%; that the R&D Tax Incentive scheme incorporates a renewed focus on high-risk applicants; and that the Bill not be retrospective to commence on 1 July 2019.

"The AIIA is supportive of any measures which are conducive to making the RDTI scheme more effective. However, we do not believe that the Bill in its current form will be conducive in achieving this goal," it said.

"Instead, such provisions will create the risk of significant unintended consequences by reducing Australia's ability to undertake more ambitious R&D projects and make us less competitive against those international competitors who provide more generous R&D incentives."

Similarly, Research Australia, an organisation representing health and medical research participants, has voiced concerns the sector has with the Bill.

"Research Australia does not support the Bill," it said in its submission [PDF] to the committee.

"With expenditure on the R&DTI Scheme failing to meet the earlier projections (which precipitated concerns about the escalating cost of the scheme) much of the rationale for the amendments contained in the Bill is no longer valid."

It suggested the committee recommend the Senate to oppose its passage.

"There is evidence that the R&DTI Scheme is delivering additionality and spillovers as intended, so the proposed changes to the R&DTI are not warranted," the organisation continued.

"There should be no amendments to the R&DTI Scheme until, and only if, the consequences of those amendments for additionality and spillover benefits are understood and have been properly evaluated."

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