The key take home message from the agenda is the intent to create a culture of innovation and technology collaboration. Its philosophy is to encourage nimble innovative entrepreneurs.
R&D tax incentive changes
It would not surprise me if there is an element of Robin Hood taking from the rich (large R&D claimants) to help feed small companies and (starving) start-ups.
The Federal Government says that it wants to ensure that the investment of tax dollars on innovation is effective.
The R&D tax incentive will be the subject of recommendations to government by a committee led by a triumvirate including the Head of Treasury (John Fraser), the Chief Scientist (Alan Finkel) and the Chairman of Innovation Australia (Bill Ferris).
- The government released an unexpectedly comprehensive Issues Paper on the R&D tax incentive on 10th February It is clear that the review was prepared with several issues and concerns in mind, notably: A federal government budget deficit; the increasing costs of the R&D incentive (a result of the incentive motivating companies to carry out more R&D in Australia); and
A proliferation of boutique R&D consultants retrospectively identifying R&D. Key proposals in the review paper included the following:
• Rates and thresholds: the tax offset rates are intended to encourage R&D investment by lowering the price of R&D with a focus on helping smaller companies. The inference being a potential cut or ceiling on the tax benefit rate for large companies.
• Restricting the type of eligible R&D expenditure so that ‘expenditure that would be incurred anyway’ would not attract the R&D incentive (for example, the Issues Paper favourably commented on regimes that only provided tax incentives for R&D wages expenditure.
• Definition of eligible R&D to focus on innovative products and services rather than business
as usual activities.
• Pre-registration of activities to overcome retrospective identification of R&D.
We would have liked more emphasis on enhancement of the R&D incentive rather than cost containment (both the increasing cost to Government of the program and the cost of compliance incurred by claimants).
But it is understandable that the review is asking if there is a simpler way to encourage a culture of innovation so that Australia gets the best return for its constrained investment.
On a positive note, the Issues Paper actively encourages increased collaboration – such as with Universities, KPMG has also recognised this opportunity and is strongly backing greater university collaboration with start-ups and high growth SME’s through its partnership with Western Sydney University’s Launch Pad innovation support program.
Companies working through or carrying out collaborative projects with Western Sydney University through the Launch Pad may receive favourable treatment under a changed R&D tax incentive – possibly from as early as the 2016-2017 tax year.
The review will report to Government in April 2016, implying changes to the Incentive may be included in the 10th May Federal Budget.
Irrespective of whether you are a large or small company, reviewing your company’s innovation activities and planning to capture available R&D incentives improves the tax benefits you can access and ensures that your innovation strategy and financial management are in synch.
Tax breaks for entrepreneurs – it won’t be a gift
Angel investors will be eligible for a tax rebate worth $40,000 on investments up to $200,000 in innovative companies. In addition, capital gains tax will not apply to such investments held for three years and up to ten years.
The aim is to provide desperately needed capital for start-ups. As with all things tax – definitions and their interpretation are crucial.
In its consultation paper Treasury has sought comments on potential eligibility principles and criteria.
The measures announced in December required that the investee company not be listed on a stock exchange, be incorporated less than three years, earn revenue under $200,000 and incur expenditure (including we assume capitalised R&D) under $1 million.
These criteria would apply nicely to most of the residents in Western Sydney University Launch Pads throughout Greater Western Sydney.
The consultation foreshadows that the tax break will be targeted at high tech and high global commercial potential investee companies.
To an extent, the definition of the R&D tax incentive looks as though it will form the crux of activities a company must carry out to qualify as an eligible investee. Features highlighted by treasury include that the company intend to develop or significantly improve upon ideas that:
• Changes the way an organisation, service delivery or process operates;
• Creates a new product or service that other organisations or consumers could use;
• Creates new delivery platform or changes the way an organisation, service or process operates; or
• Creates a new organisational or marketing method.
The latter instances above go beyond the scope of the current R&D definition and is encouraging in the sense that it encourages commercialisation success.
In addition, Treasury contemplates having metrics to satisfy the innovation criteria (including R&D intensity as a proportion of expenditure, participation in acceleration program such as Launch Pad, existence of angel type investors, success in patenting in multiple jurisdictions).
Some of these criteria may be difficult to prove for a company in under three years. In addition a host of industry categories look as though they will not be eligible.
Oversight of the regime will be through the Australian Taxation Office who may seek AusIndustry guidance (both of whom have cooperative oversight of the R&D tax incentive).
The challenges of a regime that is heavily targeted includes tax and governance complexity (with resultant compliance and monitoring costs) and may inadvertently preclude innovative business models from participation as they are not within the appetite of the government and its advisers.
