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Changes to the R&D tax offset do not encourage growth

2014 Federal Budget

The announcement that the Government will reduce the Research & Development (R&D) tax offset by 1.5% in line with the reduction in the corporate tax rate was one of the surprises of the Coalition Government’s first budget. This will not be welcomed by mid-sized businesses and will not encourage the growth the Government is seeking.

According to Sukvinder Heyer, National Head of Research & Development, “One of the aims of this budget was stability in tax policy. The reduction of the rate to 43.5% for refundable tax offsets and 38.5% for non-refundable from 1 July 2014 flies in the face of this objective. Tying this change to the corporate tax rate is an attempt to make it more palatable but ignores the fact that the companies who get the most out of the R&D tax offset are not tax-paying. They are the startups who are experiencing tax losses, so this will directly affect these companies cash balances. For companies that are paying tax the sting is the timing of the introduction: the cut to the corporate tax rate comes a year after the reduction in the tax offset rate.

"We have many clients who have come to Australia in the last two years, attracted by the tax incentive. Some of these companies are doing the research the Government is seeking to encourage with the Medical Research Future Fund. But the Government’s announcement also misses the piece around encouraging the creation of jobs. There was no discussion of these announcements in the lead up to the election including the review of innovation policy and looking at patent box incentives to encourage manufacturing to be undertaken in Australia.”

In order to have sustained growth there needs to be stability in policy. This means knowing what the position is more than one year out. “The R&D incentive has been in place for only two years now and we have many mid-sized businesses who rely on the tax incentive to continue to research and innovate. These changes come on the back of dismissing the policy for payment of quarterly credits. If the amount of cash is going to be reduced, it would have been a measure of good faith to at least have access to it on a more timely basis. From an innovation perspective what this budget has delivered is doubt – will there be further reductions going forward; are there going to be other rules?”

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