Lower R&D expenditure a ‘concern’ for Australia’s innovation, warns consultant
The drop in spending on research and development could affect Australia's ability to fuel innovation and compete in a global marketplace, warns an R&D tax incentives specialist.
Recent figures by the Australian Bureau of Statistics have revealed that national spending on research and development (R&D) had fallen to a 17-year low of 1.68 per cent of GDP in 2021–22.
HLB Mann Judd consultant Troy Smith said this represents a 0.12 per cent fall from the 2019–20 income year.
"While a 0.12 per cent decline may seem small, it reflects the challenges Australia faces to boost R&D spending – which is needs to do to remain competitive with other OECD nations," Smith said.
"This statistic falls significantly below the OECD average of 2.71 per cent but it also lags behind global leaders. For instance, South Korea has an impressive 4.93 per cent R&D-to-GDP ratio."
Smith said ensuring Australia has robust investment in R&D is critical as it fuels innovation, enhances competitiveness and secures a nation's foothold in the global marketplace.
"The current trajectory for Australia paints a concerning story, with Australia potentially slipping further down the list of OECD countries investing in innovation in the next five years," he said.
Smith warned that a decline in R&D spending could compromise Australia's standing in sectors in technology, healthcare and other sectors.
Additional clarification and guidance issued by the ATO regarding some of the R&D integrity rules should provide some assistance for those claiming the R&D tax incentive, according to Smith.
"This guidance release marks its first commentary on R&D issues in quite some time," Smith said.
The ATO guidance outlines that claiming R&D expenditure with associates involves specific considerations.
"Generally, such expenditure can only be claimed in the year of payment, unless the R&D entity opts for an irrevocable election," Smith said.
"Notably, certain arrangements are viewed as not constituting payment to associates, including converting the amount owed into a loan or offsetting a licensing fee against R&D service fees in non-arm’s length transactions."
The guidance also stresses that aggregated turnover is a crucial factor in R&D tax offset eligibility.
"Entities with an aggregated turnover below $20 million are entitled to a refundable offset, while those at $20 million or above receive a non-refundable offset," he said.
"Exemptions apply to R&D entities 50 per cent controlled by exempt entities, ensuring eligibility for the non-refundable offset, regardless of turnover."
The ATO also reminded businesses in its guidance that overseas expenditure claims require an overseas finding from the Department of Industry, Science and Resources (DISR).
"Without this, the work must be conducted in Australia, not subcontracted overseas. Physical location helps determine overseas expenditure validity," Smith said.
