Posted: 30 Sep. 2020 5 min. read

Innovating our way out of the crisis: What will the October 2020 Budget bring? 

In our recent blogs, we highlighted the current perfect storm for innovation and where firms should look for new opportunities.

With the Federal Budget fast approaching, we ask what innovation tax policies the Government could bring to the table to encourage firms to spend and innovate our way out of the crisis. Australia needs a tax policy framework that fully engages with the innovation ecosystem - the role of innovation in any meaningful pandemic recovery cannot be under-estimated, and supportive innovation policy announcements are needed now more than ever.

Software – a time to be different?

As well as the World Intellectual Property Organisation (WIPO) encouraging innovation-focused stimulus to underpin long-term technology growth, a pattern of differentiating software and technology within a context of R&D tax incentives has been emerging with the establishment of a separate Digital division of AusIndustry and a new National Tech Council in the last 18 months.

Recently an open letter to the Prime Minister from 14 of Australia’s most successful tech companies demanded a greater level of engagement to create “a strong and enduring Australian economic recovery, driven by innovation and technology.” Similarly, a Senate Committee on Financial and Regulatory Technology have recommended a need for reliability and clarity in the application of the R&D Tax Incentive to software creation, and clear limitations on the ability for refunds to be clawed back retrospectively.

Given Australia continues to fall in global innovation rankings, and the key role that technology will need to play in any economic recovery from the current pandemic, perhaps it is timely for the government to consider a separate supportive new tax regime for software activities either within the existing R&D regime, or otherwise.

Quarterly refunds

A common theme has been calls for quarterly R&D tax refunds with the current significant delay in recouping costs forcing many companies to rely on high interest short-term funding or, in certain instances, out of business.

Robust legislation to achieve this has previously been consulted on but was abandoned in December 2013. This legislation could be resurrected to address the cash-flow issues that many innovative start-ups struggle with, at little to no additional cost to the program.

Collaboration premium

Despite formal recommendations for a collaboration premium, and support from the ALP, no such premium has so far been on the table.

Given the huge disruption to Australia’s university and research sector, a collaboration premium could improve the current lack of knowledge transfer between research and business communities and increase the weak collaboration and low mobility of people between academic and business careers.

Such policy settings are also predicted to lead to much needed long-term commercialisation benefits for Australia.

Winner takes all – need for end-to-end IP regime

A post-COVID-19 ‘new normal’ will demand a greater focus on supply chain sovereignty, onshore and advanced manufacturing, and domestic talent retention and attraction. In this context, wider intellectual property (IP) incentives to generate income onshore from innovative inventions in Australia would lead to better commercialisation outcomes.

Any patent box or manufacturing incentive applying lower rates of company income tax to patented intellectual property (IP) asset profits needs to have a nexus to onshore R&D activities in a post-BEPS world. If Australia embraces an end-to-end IP tax regime, this ‘winner takes all’ scenario would encourage both highly mobile R&D activities and the subsequent commercialisation to remain onshore in Australia. If Australia does not seek to embrace both aspects, other jurisdictions may instead ‘win it all’ at Australia’s expense.

Tinkering around the edges

Other quick fix opportunities are also available to the government to ensure that the R&D legislation is assisting companies at all stages of the business lifecycle:

  • A permanent or temporary increase to the refundable tax offset threshold of $20m, now almost a decade old. Given the longer-term impacts of deferred franking debits created by R&D refunds, this would be a revenue neutral quick win for the government.
  • The carry back of non-refundable R&D tax offsets for a set period – again a largely revenue neutral measure to generate partial repayments of previous tax liabilities, only at the expense of reduced future liabilities.

Regardless of political differences, Australia will need to regrow the economy effectively and sustainably and will need a responsive and adaptable innovation ecosystem to do so, in addition to increased infrastructure spending and personal tax cuts.

It remains to be seen whether the Government will step up to the innovation plate on Budget night.

Not to be forgotten, even as the Budget announcements will be sinking in, the oft-delayed Senate report on the controversial R&D measures before the Senate is due to be tabled only 6 days later.

Irrespective of any Budget announcements, we consider that it is time that the long-running uncertainties surrounding the flagship R&D regime come to an end. 

What will the Federal Budget 2020-21 mean for you?

More about the authors

Greg Pratt

Greg Pratt

Partner, Tax

Greg is Deloitte's Global Investment and Innovation Incentives (Gi³) practice leader. Greg specialises in assisting clients lower the cost of innovation through accessing investment and innovation incentives. A key focus is on assisting clients with R&D tax incentive compliance and consulting including: preparing R&D Tax Incentive claims, advising on R&D eligibility, providing R&D planning advice, preparing overseas findings and assisting clients with AusIndustry and ATO risk review activity. Another major focus is on assisting clients identify and access grant funding programs that can support business growth. With hundreds of assistance programs on offer across different tiers of government, the Gi³ team can assist clients navigate the complexities associated with accessing government funding. Greg has a broad range of experience supporting clients in a range of industries including manufacturing, technology, defence, O&G, primary, mining, financial services, med-tech, life sciences and engineering. He has also held roles as acting CEO and CFO of a company specialising in advanced energy solutions.