Research and destruction

SUGGESTIONS that the government may do away with the research and development tax offset quite rightly has mining equipment makers worried. <b>Supply Side by Noel Dyson</b>

Noel Dyson
Research and destruction

This is one of the areas the Business Tax Working Group canvassed in the discussion paper it released on Monday.

Austmine chairman Alan Broome admitted he had not had a chance to properly consider the working group’s report when Supply Side contacted him.

That aside, Broome said he always became concerned whenever somebody proposed changes to the R&D incentive.

“This is something that differentiates Australia from other countries,” he said.

“One of our great strengths is that incentive to produce products here over the US and Canada where [R&D incentives] have been removed.

“If they take them away where does that leave us?”

So what exactly has the working group proposed?

As with many of the measures it looked at to broaden Australia’s business tax base the working group gives several options.

These range from abolishing the 40% R&D tax offset to companies with a more than $20 million a year turnover to cutting the rate of the non-refundable tax offset to 37.5%.

As the rules stand at the moment companies turning over less than $20 million are entitled to a 45% tax offset for expenditure on eligible R&D activities. All other companies are entitled to a 40% offset.

The working group admits that any change to the rules could result in some companies relocating their R&D to countries with better incentives.

It also warns that removing or limiting R&D incentives could cause companies close to a new turnover threshold to restructure in order to retain access to the incentive.

That said, the working group still came up with four options.

The first, C1, is to abolish the 40% non-refundable tax offset. The financial impact of that over the next four years would be $2.25 billion.

Option C2 is to impose a turnover threshold above which the 40% non-refundable tax offset could not be claimed.

Treasury’s preliminary estimate is that imposing an upper turnover threshold at $10 billion would provide savings of about $250 million a year. A threshold of $20 billion would bring savings of about $200 million a year.

The group suggests the turnover threshold would be applied on the same basis as the existing $20 million aggregated annual turnover test to the 45% refundable tax offset.

Option C3 is to cap the amount that can be claimed annually under the 40% non-refundable offset.

Treasury estimates that would save about $200 million a year .

Option C4 is to cut the rate of the non-refundable offset to 37.5% for companies with a turnover of more than $20 million a year.

This, the group argues, recognises that companies with such turnovers would usually have greater capacity to undertake R&D.

It should be noted that the working group has only put up a range of options.

This clears the way for the consultation process. Written submissions have to be in to the Business Tax Working Group Secretariat by September 21.

The group plans to have a draft report to the Treasurer by October and for the final report to be handed in by the end of December.

It also should be noted that the working group is working from a limited base.

Taxation Institute tax counsel Deepti Paton points out much of the business tax base broadening measures already were cherry picked by the Ralph report. That’s the report that brought Australia that smash hit the Resources Super Profit Tax and Kevin Rudd a new job.

The working group also was hamstrung by orders from Treasurer Wayne Swan that the review be revenue neutral.

Call Supply Side cynical but revenue neutral in this context usually means try and get us more money if you can.

Another thing to consider – a direct quote from the discussion paper: “The government has stated that the working group’s highest priority is to consider ways of funding a cut to the company tax rate from within the business tax system”

This sort of thing just fuels the fire of belief that Swan is just continuing his war on the mining sector.

Which leads Supply Side to this point.

Given Swan’s stated love for Bruce Springsteen, here is a lyric from Springsteen’s song Darlington County that many in the mining industry would no doubt love to see.

“Drivin’ out of Darlington County, seen Wayne handcuffed to the bumper of a state trooper’s Ford.”

This article first appeared in ILN's sister publication


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