Fairness and the R&D Tax Incentive: rumours of changes in Budget 2018

“Fair go” – every Australian ever


With the Australian 2018 Budget now only a few days away, we wanted to take a few moments and reflect on the speculation surrounding the changes to the R&D Tax Incentive.


In Australia, 15,000 companies each year make their best attempt at innovating their way to a winning business thanks to the R&D Tax Incentive. This figure was below 9,000 companies 6 years ago.  Unsurprisingly, the significance of the increase in R&D claims has set off governmental alarm bells.


To add fuel to the fire, both AusIndustry and the ATO have recently released Taxpayer Alerts indicating that there have been high-risk claims across many industries, and both agencies have increased their R&D audit activity.


So the Australian Government is faced with this question: have Australian businesses been taking their fair share from the R&D Tax Incentive?


It seems like the answer is ‘no’ and the government is therefore doing what it believes it must; change the tax legislation to limit the public expenditure on R&D.  Speculation is that these changes are most likely to manifest themselves in the form of:

  1. Intensity test: Businesses could be required to spend a minimum of 1-2% of their annual costs on R&D in order to qualify for the R&D Tax Incentive, an initiative which would de-incentivise businesses to take on small experimental projects.
  1. Cap refunds: Businesses could have their annual R&D refunds capped, with a lifetime refund cap imposed. This would de-incentivise long-term, high value (and arguably more meaningful) R&D from being undertaken.
  2. Tighten eligibility requirements: Restrictions on what qualifies as ‘core R&D activities’ (particularly in the ICT industry) or the extent to which ‘supporting R&D activities’ can be claimed.


It is unfortunate that whichever legislative solution the Australian Government selects, there will be some innovative businesses that will not see fairness.


Working at the coalface of R&D Tax Incentive claims, we propose that there is a much simpler solution to this problem; better AusIndustry and ATO guidance to enable self-assessment with more certainty.


When we speak to businesses, we don’t hear anyone saying that they want to be a tax cheat.  We hear everyone saying that they are more than happy to pay their fair share, but that they don’t want to pay 1 cent more than their fair share.  Which we think is fair.


We hypothesise that the root cause of the increase in R&D claims over the past 6 years, and the views taken by the AusIndustry and the ATO in relation to invalid claims being made, is the result of ambiguous guidance.  For example, we are regularly asked by businesses what documents AusIndustry mandates that they maintain to substantiate the conducting of an experiment. Our honest answer is that AusIndustry doesn’t mandate any specific documents, but that they do require maintaining some.  This lack of certainty is frustrating and could lead to disputes during audits.


As Australia is getting ready to tighten its innovation belt, governments across APAC are doubling down on their R&D spend. The New Zealand Government announced recently that it is reinstating its R&D Tax Incentive program, and Hong Kong is currently reviewing a bill to implement a 300% tax deduction on local R&D projects.


We hope that the 2018 Budget won’t see us watching as our best and brightest minds take their brilliant ideas offshore.  But we’re fairly certain that it will.


If you have any questions as to how the anticipated changes could affect your business, we are happy to shed light on your unique case. Feel free to contact us at ayla@catalystsolutions.com.auor dave@catalystsolutions.com.aufor a chat.

Ayla Kremb – Fundraising Manager, Catalyst Solutions

Dave Corbin – Managing Director, Catalyst Solutions