The unveiling of the 2014 budget contains a few surprises for the R&D Tax Incentive. The first part is that it is proposed that from July 1, 2014 the Incentive will be dropped by 1.5%, from 45% to 43.5% for companies under $20 million in aggregated turnover and from 40% to 38.5% for companies with an aggregated turnover of over $20 million.
This measure is estimated to provide a gain to the budget of $620 million saving for the government and leaving startup companies with less available funding.
This proposal reduces the Incentive by the same amount as the proposed company tax rate cut of 1.5%. This will maintain the same amount of tax benefit provided by the R&D Tax Incentive.
There are a few issues with this proposal:
1. 2014/15 Claims will experience an R&D Tax benefit that is actually reduced by 1.5% as the lower tax rates are not proposed to come in until the 2015/16 financial year. This seems to us to be an unnecessary burden on the R&D community, as there seems to be no reason that they can’t bring in the new rates at the same time as the Tax Rate Cut.
2. The Corporate Tax Rate Cut is only proposed, and may never eventuate. There is an unfortunate history of governments proposing corporate tax rate cuts for the future that never get passed. The reasons behind this outcome are understandable; corporate tax cuts are often not a priority of the electorate or the bean counters. This may make a reduction in the R&D Tax Incentive permanent, which would be a very unfortunate consequence.
3. The R&D benefits for startups will be reduced. Many startups who are running a full loss and usually receive 45% of their R&D expenditure as a tax refund, will find the amount reduced to 43.5%. While this may seem a small difference, every dollar in a startup must go a long way; across the startup community this will be a significant loss of money that is available to develop the companies of tomorrow.
4. A major change from the R&D Tax Concession Program to the new R&D Tax Incentive was to decouple the R&D benefit from the tax rate. The reduction in the company tax rate without changing the 45% R&D Tax Incentive rate would have seen a boost of the R&D benefit which would further encourage R&D in the Australian business community. This is an opportunity lost, especially with the reduction of other industry assistance programs.
Other major changes from the budget include the elimination of the Commecialisation Australia program with all applications being put on hold as well as the Innovation Investment Fund. There is also a budget for a new program called the Entrepreneurs Infrastructure Program, which we will certainly keep an eye on as it forms.