Budget 2020: Government pledges $2 billion to R&D Tax Incentive, and rolls back some of the more controversial reforms

The government is going ahead with scaled-back changes to the R&D Tax Incentive (RDTI) scheme, removing some of the most contentious elements, including the $4 million refunds cap and the potential for 2020 clawbacks.

In tonight’s budget announcement, Treasurer Josh Frydenberg committed $2 billion to the RDTI scheme, calling research and development and the adoption of digital technology “critical to Australia’s future prosperity”.

Crucially, the budget removes the $4 million cap on RDTI refunds. The budget papers also confirm that changes will now come into effect from July 2021.

Previously, it was thought changes would be implemented retrospectively to July 2020, meaning many businesses were facing the possibility of paying back their RDTI rebates.

Delaying implementation is intended to “provide businesses with greater certainty as they navigate the economic impacts of the COVID-19 pandemic”, the papers said.

The plans fall short of scrapping the RDTI changes altogether — something many startup founders and tech leaders were hoping for.

But, it does change the state of play for the better, coming in stark contrast to last year’s budget measures, which effectively cut $1.8 billion from the scheme.

The fine print

For small companies, with aggregated annual turnover of less than $20 million, there will be no tiered approach to the RDTI.

Instead, the refundable tax offset has been set at 18.5 percentage points above a company’s tax rate.

The controversial $4 million cap on annual refunds has also been scrapped.

For companies with aggregated annual turnover of $20 million or more, the government is still taking a tiered approach, but instead of three tiers, there will now be two.

This is intended to provide more clarity around R&D spending, while also rewarding those businesses that invest more.

R&D rebate eligibility will be judged as a proportion of the business’ total expenses for the year.

Those who spend between 0% and 2% of their total expenditure on R&D will be able to claim 8.5 percentage points over their company tax rate.

Those who spend more than 2% of their total expenditure on R&D will be able to claim 16.5 percentage points over their company tax rate.

Finally, the threshold on eligible R&D expenditure will increase from $100 million to $150 million, as originally planned.

Industry pressure

Amendments to the RDTI scheme are currently under consideration by the Senate Economic Legislation Committee, which is due to release its report in October, following a string of delays.

The proposed changes to the RDTI were controversial even before the COVID-19 pandemic.

The tax incentive has often been hailed as one of the things making Australia attractive to startups and larger tech companies alike, as well as offering an incentive for startups to stay, and grow, in their home country.

But, as the crisis dragged on, prominent tech players have repeatedly spoken out against the changes, saying this is not the time to disincentivise innovation.

Back in August, a consortium of Aussie tech leaders wrote to Prime Minister Scott Morrison to demand a halt to the reform.

“While we appreciate that the Bill was born in a different time to achieve different objectives, we strongly oppose it today not only for what it contains but for what it is lacking — measures to actively support and stimulate R&D activity in Australia at a critical juncture as the innovation and tech sector seeks to recover from the global impacts of COVID,” the letter said.

“Now is not the time to reduce the level of government support for R&D in Australia.”

The group urged the government to use the RDTI scheme as a way to stimulate innovation, allowing the tech sector to play a part in the economic recovery, post-pandemic.

Elsewhere, while founders really wanted to see the amendments scrapped, there was also simply a demand for clarity here — something the government seems to have delivered, at least in part.

Tonight’s announcement follows Morrison’s very slight hint at a backtrack on the amendments last week. When announcing the $1.5 billion manufacturing plan, the Prime Minister was quizzed on whether a $1.8 billion cut to the R&D scheme made sense.

He was asked outright whether the government was considering rethinking the proposed changes.

“We certainly want to encourage more research and development,” Morrison said.

“Our answer to that question will be delivered by the Treasurer next Tuesday night.”

A strong argument

StartupAus chief Alex McCauley had called addressing the confusion around RDTI the “number one priority” for startups in this federal budget.

However, speaking to SmartCompany last week, he was also confident we would see a good result here.

“Whatever the merits were of amending the RDTI to make it more efficient and to reduce the cost, it’s pretty clear that now is not the time to be reducing investment in Australia’s economic future,” McCauley said.

Because of the timing, he called the amendment “basically a non-starter”.

The arguments against the changes were strong, especially in a COVID-19 context, he said.

“I can’t see those getting past parliament.”

In their open letter, the consortium of startups also called for more engagement with the tech sector on those policies that affect them the most.

Perhaps their voices are finally being heard.

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