This article is more than 1 year old

This article is more than 1 year old

An inquiry has recommended the government shelve plans to restrict access to lucrative research and development tax incentives over concerns it could stifle innovation and force companies offshore.

The Coalition proposed clamping down on its R&D tax incentive in last year’s budget, proposing a suite of measures to save $2.4bn.

The then treasurer Scott Morrison said the incentive payments – which account for one-third of all government funding for research and development – had been “taken for a ride by some and integrity needs to be restored”.

The government proposed capping cash refunds for research activities at $4m, introducing a new “intensity test” for larger companies to favour higher, more intensive R&D investment, and significantly increasing compliance and enforcement measures.

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The changes prompted a significant backlash from businesses and research groups, which warned it would stifle innovation, add unnecessary complexity, force companies to move operations offshore, and cause general uncertainty in the sector.

A Senate inquiry into the proposal on Monday recommended it be delayed.

“On the weight of evidence presented, the committee considers that the bill should not proceed until there is further consideration of the R&D tax incentive measures,” the committee said in its report.

The government’s proposal was based on a 2016 review of the R&D incentive, conducted by the chief scientist, Alan Finkel, the former innovation and science Australia chairman Bill Ferris and the then Treasury head John Fraser.

Companies with a turnover of less than $20m annually would have their cash refunds for the incentive capped at $4m, though clinical trials would be exempt from the new cap.

These smaller companies would also receive a lower refundable tax offset rate, set at their corporate tax rate plus 13.5%. That was a significant change from the past arrangement, where smaller companies received a flat 43.5% refund on every dollar spent on R&D.

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Bigger companies would face a new intensity test, meaning their tax offset depended on the amount they spent on R&D compared to their total expenditure.

The Senate inquiry heard evidence from a range of sectors fearing the change could jeopardise innovation and threaten businesses. The inquiry heard that companies that do both research and manufacturing in Australia would be disadvantaged by the new intensity test, because their total expenditure would be higher.

Research Australia, the peak group for the sector, said the intensity test could simply prompt companies to move all non-R&D operations offshore to reduce total expenditure.

“By linking the R&D [tax incentive] to the value of R&D as a percentage of total expenditure, the proposed measure not only provides an incentive to increase R&D, but an incentive to reduce other expenditure,” the group said.

“One obvious way to do this is to retain R&D in Australia but move other expenditure, such as manufacturing, to other countries. It also acts as a disincentive to companies undertaking R&D in Australia to increase manufacturing in Australia, and to bring manufacturing on shore.”

The committee said the $4m cap could “benefit from some finessing to ensure that R&D entities that have already made investment commitments are not impeded unintentionally”.

Guardian Australia approached the treasurer, Josh Frydenberg, for comment. The R&D incentive crackdown is attached to an omnibus bill that also includes measures to stamp out tax avoidance.

That included amendments to prevent companies from loading up debt artificially to shift profits and avoid tax. The inquiry recommended the government proceed on all other parts of the bill.