BDO urges government to streamline R&D tax incentives

BDO has praised the federal government’s R&D tax incentive (RDTI) program, which provides tax benefits to private firms that engage in demonstrable R&D activities.

“One of the foremost benefits of an RDTI program is its broad applicability across various industries,” the firm said.

“Unlike competitive grants that often cater to specific sectors or target particular research areas, tax incentives are universally accessible, enabling businesses from diverse fields to benefit.”

The government has sought advice on how to improve the Australian R&D landscape, in a bid to boost languishing productivity and secure Australia’s long-term economic prosperity against global shocks.

In its discussion paper, the government noted that Australia had lower R&D intensity than other OECD countries. Australia’s gross R&D expenditure was 1.66 per cent of GDP in 2021–22, compared to the OECD average of 2.9 per cent.

BDO highlighted that the RDTI was the only mechanism that provided non-discretionary and industry-agnostic R&D support for private firms.

In light of this, it raised concerns regarding the government’s proposal to exclude R&D activities related to the gambling and tobacco industry, and said the exclusion would set a “concerning precedent,” and go against its industry-agnostic approach.

“If R&D tax policy continues to be subject to the prevailing political atmosphere, it will lead to taxpayers questioning the reliability of the RDTI for the purposes of long-term planning,” BDO said.

The firm also called on the government to streamline the RDTI process. For example, the application form should be simplified, and safe harbour expenditure measures should be introduced in order to reduce compliance costs.

It also argued that the government should increase and index the turnover threshold for refundable offsets to $50 million, noting that the annual turnover threshold of $20 million had not been updated in 14 years.

BDO recommended that RDTI reviews be conducted by ATO staff with in-depth knowledge of the program, as misunderstandings had led to incentives being withheld.

“BDO has numerous examples where legitimate claims have been denied or monies withheld by ATO officers who lacked the requisite understanding of the program,” BDO wrote in its submission.

“These officers often wrongly view the incentive as a tax exploitation scheme rather than a crucial mechanism for fostering innovation within Australia.”

Independent policy think tank, the Centre for Policy Development (CPD), suggested that small businesses looking to conduct R&D be better supported.

The think tank pointed out that small businesses carrying out R&D did not always pay sufficient taxes to benefit from the RDTI.

CPD recommended that Australia follow the US model, where innovation tax credits available under the Inflation Reduction Act were transferable between firms. Under this policy, large companies could buy the tax credits from start-ups with minimal tax exposure, allowing R&D tax benefits to flow to small, innovative start-ups.

“The Commonwealth Government should establish similar arrangements for R&D tax credits to ensure that its policies can impact the economic viability of start-ups and SMEs involved in early stage innovation,” CPD said.

Domestic R&D activity has been largely upheld by universities, the government discussion paper found. Lagging commercialisation of R&D has negatively impacted economic complexity in Australia, which is a strong predictor of future growth.

Australia’s economic complexity, as measured by export diversity, had been in decline since 1995. It currently ranks 75th out of 132 countries in terms of economic complexity, behind Guatemala, Kyrgyzstan and Jordan, 2023 data from the Observatory of Economic Complexity showed.

“Australia has a strong research base. The difference between the innovation novelty of our firms and our research output indicates we have underused national resources,” the discussion paper said.

“Australian research is being developed into globally transformational technologies – most often by other countries. The old approach – waiting on other nations to turn our ideas and discoveries into products and services that we then adopt at higher cost – is not the path we want or need.”