In its changes to the R&D tax incentive, the federal government has chosen to target primarily big business rather than startups in its efforts to save $2.4 billion over the next four years.
The scheme, which costs the budget more than $3 billion, has been growing at a rapid rate with the continued growth in the innovation sector.
However, the startup sector has not escaped altogether, with the introduction of a $4 million cap on the cash refund available to companies with annual turnover of less than $20 million.
The announcement of the cap will be of great concern to those startups that are in the non-revenue generating phase of their development. Many startups in the biotech sector frequently need to invest more than $4 million a year on R&D to establish a potential future revenue base.
StartupAUS chief executive Alex McCauley warned prior to the budget that a $4 million cap would be of concern. He said that for some in the sector it would create a threat that could lead to a move of some R&D activity offshore.
There was a small concession in the budget allowing an uncapped cash refund for R&D expenditure related to clinical trials.
The changes are less draconian than the original proposal by the R&D tax review in 2016 of a $2 million cap. However, FinTech Australia chair Stuart Stoyen earlier this week warned that any cap would be detrimental to the fintech sector.
He also called for a change in the administration of the scheme to increase the focus on commercialisation and reduce the emphasis on proof of new knowledge to qualify for a concession.
Far from loosening access to the scheme, the government has said it will “improve the integrity of the R&D program by implementing stronger compliance and administrative improvements”.
The government will also increase funding for “enforcement activity” by the Australian Taxation Office and the Department of Industry, Innovation and Science, which jointly administer the scheme.
The budget papers also revealed the government intends to publish the details of R&D concession claimants and the expenditure they have claimed.
How the new scheme will work
The government in making the savings has cleverly targeted larger companies that spend a relatively small percentage of their business expenditure on R&D.
The changes mean that companies with annual turnover of more than $20 million that spend less than 2% of their business expenses on R&D can only claim a tax offset of four percentage points (above the 30% marginal tax rate) of their R&D expenditure.
For the portion spending between 2% and 5% of total business expenses on R&D, they can claim an offset of 6.5%. It is only when the proportion of R&D expenditure reaches between 5% and 10% that the offset at 9% exceeds the previous level.
For those few large companies spending in excess of 10% of business expenses, the spending above 10% can be offset at 12.5%. This will potentially increase the value of the concession compared to previous years for those companies spending significantly more than 10% on R&D.
This could prove to be a significant benefit to larger startups with more than $20 million in turnover that were previously limited to a 38.5% offset on their expenditure. The offset (unlike the cash refund) is only of benefit to companies generating profits.
For the handful of companies in Australia that might qualify, the annual threshold on R&D expenditure eligible for a tax offset has been raised from $100 million to $150 million.
This was another recommendation of the R&D review, although it had suggested an increase in the threshold to $200 million.