Research and Development Tax Incentive

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The Research and Development Tax Incentive (R&DTI) is a tax relief provision designed to help companies innovate and grow by offsetting some of the costs of eligible R&D activities.
What are the main aims and objectives?

The main aims and objectives of the Research and Development Tax Incentive (R&DTI) in Australia are to encourage businesses to conduct R&D activities that would otherwise not be conducted due to financial constraints. By offering tax offsets, the program intends to stimulate economic growth, enhance competitiveness, and improve productivity across the Australian economy. The R&DTI also aims to increase the amount of beneficial R&D being conducted within the country by elevating the expenditure threshold and replacing certain provisions with more precise amounts.

How does the program work?

The R&DTI, serving as a self-assessment program, aids in offsetting part of the costs of eligible research activities, thereby fostering investment in innovation. Particularly, the program targets smaller firms, offering them more predictable support that is crucial for their R&D endeavors.

The R&DTI offers two rates: a 43.5% refundable tax credit for companies with an aggregated turnover of less than AUD 20 million (approx. $12.9 million), and a 38.5% nonrefundable tax credit for companies with a turnover of AUD 20 million or more.

To qualify for the R&DTI, companies must be Australian tax residents, conducting their R&D activities within the country. Additionally, they must incur a minimum of AUD 20,000 (approx. $12,900 in eligible R&D expenditures. The R&D activities should adhere to specific actions outlined in the legislation.

The program operates on a self-assessment basis. Companies interested in availing the tax offset must register their R&D activities with AusIndustry. Subsequently, they can claim the tax offset through their annual tax return filed with the Australian Taxation Office (ATO).

What is the overall cost?

The Australian government is projected to invest AUD 3.2 billion (approx $2.1 billion) through the R&DTI in 2023.

How was it implemented?

The Research and Development Tax Incentive (R&DTI) is administered by AusIndustry and the Australian Taxation Office. It stems from the 1980s, during a time of significant economic reform in the country. Over time, the R&DTI has undergone multiple revisions to better target support and align with changing economic conditions. These changes have included clarifying eligibility criteria and adjusting the tax offset rates, ensuring the incentive remains relevant and effective in promoting R&D activities.

Recent changes to the program, introduced on July 1, 2021, include a shift from a refundable offset rate to an offset rate above the company's tax rate, heralding a progressive marginal tiered R&D intensity threshold. This modification is aimed at better catering to the varying needs of companies depending on their R&D intensity. The expenditure threshold has also been increased from AUD 100 million to AUD 150 million, offering higher spending capacity for R&D activities.

What impact has been measured?

Policymakers can demonstrate that their objective of increasing the overall amount of R&D spending in Australia. Over the period of 2012-2019, the number of recipients of R&D tax relief increased from approximately 7,900 to 10,800 with a peak in 2016 of 12,920. SMEs received the majority of this tax relief with an average share of 85%. Similarly, as a percentage of GDP, R&D tax support increased from 0.06% in 200 to 0.12% in 2019. However, no information is available on the wider economic impact of the companies in receipt of the R&DTI.

What lessons can be learned?

A review of the R&DTI in 2016 found that the program fell short of meeting its stated objectives of additionality and spillovers. To remedy this the report recommended a package of six measures to be considered to improve the effectiveness of the program:

  1. Develop new guidance, including plain English summaries, case studies and public rulings to give greater clarity to the scope of eligible activities and expenses.
  2. Introduce a collaboration premium of up to 20% for the non-refundable tax offset to provide additional support for the collaborative element of R&D expenditures undertaken with publicly-funded research organizations.
  3. Introduce a cap of AUD 2 million on the annual cash refund payable under the incentive, with remaining offsets to be treated as a non-refundable tax offset carried forward for use against future taxable income.
  4. Introduce an intensity threshold around 1 or 2 percent for recipients of the non-refundable component of the R&DTI, so that only R&D expenditure in excess of the threshold attracts benefit.
  5. Introduce the expenditure threshold to AUD 200 million so that large R&D intensive companies retain an incentive to increase R&D in Australia
  6. The Government should investigate options for improving the administration of the R&DTI and additional resourcing that may be necessary to implement the enhancements.

CURATED BY

Tom Hancock

Research Associate
Global Entrepreneurship Network
United Kingdom