The Senate’s Economics Legislation Committee report was tabled on Monday 11 February and in its collective wisdom, the committee has put on hold proposed changes to the research and development (R&D) tax incentive.
The incentive, imperative to the livelihood of the Australian innovation industry, was threatened with a raft of changes following a review of the legislation.
First impressions on considering the committee’s report are that it is probably the best result from a bad situation. Three years on from the review into the incentive and Australia has been left with changes to the R&D tax legislation that the committee recommends the Senate not support unless two significant elements are reconsidered.
The committee has concerns with two provisions that effectively formed the backbone of the proposed changes and to this end, their concerns are warranted. Both provisions have the potential to result in consequences that have not been appropriately considered in drafting the legislation.
While the findings of the committee are welcome, there is no doubt that the current situation is disappointing – the R&D tax review and proposed changes progressed considerably and over a significant period of time before an appropriate decision was reached.
Since Prime Minister Turnbull implemented a review of the R&D tax incentive in December 2015, industry submissions have overwhelmingly asserted that the review presented weak arguments based on flawed financial data and unsophisticated modelling and analysis throughout.
Our R&D tax team has been an enthusiastic contributor to the dialogue surrounding the changes. From submitting multiple papers to many consultation rounds, attending hearings and workshops, they have been present and vocal in their critique of the use of incomplete data to assess impacts. Given the consequences of proposed changes on businesses, innovators and the start-up sector, RSM has been heavily involved in the political and real-time storm brewing on this topic.
I was invited to attend Parliament in November 2018 to be part of the committee’s hearing on the legislative changes. On reading the committee’s report and witnessing firsthand the political talk around the changes, the committee has indeed been tactful in its wording.
While the committee correctly asserts that further analysis is required prior to the implementation of changes, it has also remained silent on a number of other points pertinent to the impact of proposed changes including international tax considerations and losing innovation to other countries that boast far more competitive government support programs.
The report correctly states the fundamental bases for legislation changes as increased efficacy, integrity and fiscal affordability of the R&D tax incentive. What is clear, however, is that the committee was presented with a lack of sufficient data in its consideration of the impact of R&D tax changes.
What is particularly bemusing is a quote in the report of a statement made by the Treasury during the November hearing which reflects their belief that the behavioural impact of the legislation changes would yield no net impact based on, wait for it, their ' judgement'.
Unfortunately, a ‘judgement’ falls short of meeting the requirements of a sound investigation and supporting data. I was sitting in the November hearing when that statement was made; strangely reminiscent of an iconic Australian movie,“ it’s the vibe…”. A judgement, much like a vibe, is subjective, but what is required here are the facts – decision making backed by a thorough understanding of the issues.
Without consideration of the impact of changes in appropriate economic detail, mere use of ‘judgement’ clearly demonstrates a lack of care about any impact the changes would have. It stands to reason to question the credentials of those making decisions and their proficiency on the inner workings of innovation in the real world.
At this point, the Australian economy has been dealt a reprieve from an innovation perspective and should be grateful to the committee and government processes for halting new legislation which would have dramatically damaged innovation in Australia.
Given Parliament’s heavy agenda and limited seating days, it is not reasonable to expect any final decisions to be made about the legislation. In the meantime, R&D specialists can rejoice in their “told you so” moment. This is a good result for the Australian economy and bodes well for the future of the incentive itself.
For more information on the R&D tax incentive
If you have any questions or require any further information, please contact an RSM R&D tax specialist today.