A message from Paul Cooper
Proposed capital gains tax changes continue to generate robust discussion, three weeks after the Federal Budget.
For manufacturers, however, the most research-intensive group in an economy that underperforms in business Research and Development (R&D), I think more immediate attention should be on the R&D Tax Incentive (RDTI) proposals.
R&D funding, properly targeted, is a sensible investment of government money. In Australia, about three-tenths of this goes towards the RDTI, which provides either a refund or tax offsets for the companies that qualify.
Qualification could arguably be better-targeted at times. This was one part of the recent Ambitious Australia Strategic Examination of R&D report (SERD), with a set of connected recommendations to reform Australia’s research, development, and innovation (RD&I) system.
Its RDTI recommendations include increasing the minimum expenditure threshold on R&D from $20,000 to $150,000, removing the current $150 million cap on R&D expenditure altogether, and offering more generous incentives for companies in a “premium startup stream” for three years, with potential to extend this by another three for “deep tech” startups.
Apparently responding to this, the Budget introduced an increase in the minimum expenditure threshold from $20,000 to $50,000, raising the cap on R&D expenditure to $200 million, and a controversial age limit of 10 years for companies to claim the SME R&D tax refund from the date of incorporation.
Unfortunately, the last measure is particularly unsuited to the long development timelines of many manufacturers (“deep tech” or otherwise).
The changes represent an incredibly selective read of SERD’s recommendations: selective enough to ignore repeated cautions against piecemeal implementation.
As the summary puts it: “Adopting only parts will be another example of incremental changes and band-aid solutions that will turn the Intergenerational Report’s prediction of a decline in projected living standards into a reality”.
As an example, Recommendation 5b states “Enabling advanced payments on a quarterly basis [for RDTI] for startups”. This recommendation, amongst many others, has not been mentioned in this Federal Budget nor signposted for later implementation.
In our network, AMGC has many highly promising but pre-profit companies which are older than a decade. For them, losing the cash refund would be ruinous or a strong reason to relocate overseas.
The point is, that it is not just the companies that can choose to move their business overseas, but investors can more easily move their investment capital away from Australia to more favourable investment outcomes, leaving fewer capital sourcing alternatives for start-ups with high intensity R&D.
One perverse example would be an SME past the 10-year age cliff that successfully tendered for a Defence contract. Say the contract is worth $5 million over three years and was successfully negotiated under the assumption of RDTI refunds worth half a million dollars in the second year and $1.5 million in the third. That company might have to shut down due to its changed position and would be unable to renegotiate its contract with the Commonwealth.
Or consider the world of biotech, where development timelines are particularly misaligned. A decade might not even be enough time to reach human trials. What happens then?
So serious is this issue in biotech that almost none of the 2025 recipients of the RDTI would qualify for a refundable offset under these revised rules.
If passed, the RDTI changes would be effective on 1 July 2028 and are only proposed at this stage. I trust that this industry feedback will reach appropriate legislators who have a clear understanding of the proposed RDTI changes and their detrimental impact and can readjust the rules accordingly.
On a happier note, it was absolutely wonderful to attend Australian Manufacturing Week in Brisbane last month, in particular the annual Endeavour Awards.
Among winners were companies AMGC had helped via co-funded projects (iOrthotics and REDARC), as well as the Industry Growth Program participants (Space Machines Company).
A real point of pride for the team was getting a shout-out from iOrthotics co-founder Dean Hartley in his acceptance speech, where he thanked and acknowledged the work of the AMGC team as “They were the ones who got us started on this journey. And this is where we are now.”
Every day at AMGC is a treat, though some more than others.