Senate committee happy with Budget changes to Australia's R&D scheme

The committee considers the new measures announced in the 2020-21 Budget to sufficient as they provide 'significant clarity and motivation' for all sectors undertaking R&D.

Australia's research and development (R&D) laws have faced scrutiny from the country's startups and big business, with many telling the Senate Economics Legislation Committee during its probe of the initiative that it greatly missed the mark.

However, within the 2020-21 federal Budget was a new R&D-focused measure that the committee considers to be good enough to progress work on the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019.

"While many across the research and industry sector have found that the bill potentially did not hit the mark they were looking for, the committee considers that the new measure announced in the 2020-21 Budget should provide significant clarity and motivation for all sectors undertaking R&D," it wrote in a report [PDF] delivered on Monday.

The Budget contained a AU$2 billion boost in additional research and development tax incentives (RDTI), with government touting that the amount would help businesses manage the economic impacts of the COVID-19 pandemic.

"Research and development, the adoption of digital technology, and affordable and reliable energy will be critical to Australia's future economic prosperity," Treasurer Josh Frydenberg said during his Budget speech.

The amendments see small companies, with total annual turnovers of less than AU$20 million, receive a refundable R&D tax offset that is set at 18.5 percentage points above a company's tax rate. It also sees the AU$4 million cap on annual cash refunds canned.

Meanwhile, for larger firms, with annual turnovers of AU$20 million or more, the government said it will reduce the number of intensity tiers from three to two.

"This will provide greater certainty for R&D investment, while still rewarding those companies that commit a greater proportion of their business expenditure to R&D," the government stated.

See also: RBA says entrepreneurial 'dynamism' key to a post-coronavirus Australian economy

The government also confirmed all other aspects of the 2019-20 mid-year economic and fiscal outlook, including the increase to the R&D expenditure threshold from AU$100 million to AU$150 million per annum.

The changes will commence from 1 July 2021, with Frydenberg touting that the changes would help more than 11,400 companies that invest in R&D.

"The committee is supportive of well targeted taxpayer funded assistance of research and development where it encourages activities with broad economic benefit. In particular the committee is very concerned about the impact that the COVID 19 pandemic is causing to the Australian economy and businesses and welcomes the certainty the new Budget measure provides business in a post COVID recovery," the committee wrote.

It said that the proposed two-tier structure should encourage greater R&D expenditure than the measures proposed in the 2019 Bill.

The committee in February last year asked that 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.

Up until Tuesday, the Bill remained mostly unchanged, with there only being minor tweaks to premium offsets.

With a long list of companies and organisations begging the government to pull the Bill, or to at least listen to their views on how to make it practical, the Department of Industry, Science, Energy and Resources admitted in June it had not held consultations with the industry since it was asked to refine the Bill and that it was keen to push forward with the Bill as it stands, as "concerns have been noted".

With the two major changes to the Bill keeping the committee happy, it now believes the measures are sufficient for assisting the largest investors in keeping their R&D activities in Australia.

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