Although the Federal Budget is being marketed as an ambitious reform it is more like a revolving door between pillaging Peter and rewarding Paul. “Trust me, it will be ok, I am genuine about this” is not the best way for a Treasurer to explain Budget measures to a skeptical punter or entrepreneur.
The RDTI is a mainstay of any company undertaking R&D or innovation. Since inception the RDTI has been available to any company undertaking eligible R&D activities and incurring eligible expenditures on that activity. It has been inclusive not exclusive. Is that still the case? What new principles has the Budget introduced or abandoned that will change access to the RDTI? How does the RDTI work with other funding programs to support commercialisation of innovation? The Budget made a long list of changes, but what is the net outcome when the dust settles? What is the chance that these announcements might be legislated?
The overall RDTI budget for 2026/27 and over the forward estimates assume stable RDTI budget expenditures of roughly $5Bn, down from $6Bn. RDTI is being squeezed by 17%, even if the economy grows over this period. This is not aligned to the Government’s stated productivity and growth Agenda given innovation is an indispensable contributor to growth. Budget FAIL.
Upscaling the RDTI for Core Activity expenditures by 6.5% and removing RDTI eligibility for Support Activity expenditures is said to reduce the complexity of RDTI administration. This depends on how you define eligible Core Activity and excluded Support Activities. For example, making prototypes that can be tested in an experiment is generally regarded as a support activity that must occur before the testing experiment is undertaken. Experiments generally need to be conducted in a lab or controlled environment or on prototype tooling/equipment. Often the range of equipment needed to conduct a sophisticated experiment that might not last long but is essential to develop new knowledge, or prove a hypothesis, costs more than the experiment itself. If the cost of an experiment (Core Activity) exceeds 74% of an applicant’s Total R&D claim this financial year, then from FY2027/28 his change will be neutral to an R&D claimant. But if the spend on Core Activity is lower because of the costs of experimental set-up, an RDTI applicant will get a much smaller R&D benefit. Logic FAIL. Budget FAIL.
One could muse that this change is designed to drive SME’s to outsource experiments to underutilised University facilities, or to use labs owned by other Registered Service Providers, where the cost of supporting experimental infrastructure is covered in the contracted cost of the experiment itself, but that would be too cynical given that the SERD Committee was dominated by Group of 8 Professorial types with a heavy University preference. There are many reasons why Industry RDTI claimants choose to establish their own independent laboratories or R&D facilities. Why should they be penalised for this? Budget FAIL.
What principles have been applied or not applied?
- RDTI costs too much money. Squeeze it. Budget FAIL.
- There is no such thing as additionality, the idea that the RDTI should be targeted to businesses to encourage them to do more R&D and away from big businesses that can and do fund the R&D they want to undertake independently for strategic or competitive reasons. There is no additionality in allowing large businesses to access the RDTI. The last R&D Review Report talked about additionality at length. Prior Reports barely rate a mention in the SERD Report. Budget FAIL.
- The SERD report suggested that there was much sub-scale R&D being undertaken that should not be supported as a reason for suggesting the minimum spend should be lifted from $20,000 to $50,000. It also suggested that the refundable tax offset should be focused on “high growth firms”. These are new principles, but what is “sub-scale” R&D? What is a “high growth firm” and what relationship does a high growth firm have to “higher R&D spend”. Sounds academic. Certainly not part of the cause and effect rubric that we normally apply in industry. The value of R&D does not depend on $$ spent but on how well each R&D $ is spent to address a known problem with a big market opportunity. Efficiency (cost and speed) and effectiveness of R&D are two relevant business principles not mentioned in the SERD Report, but they underpin market translation. Companies that spend less on R&D but make it count make more money and build enterprise value. Basic business 101. SERD and Budget FAIL.
How does the RDTI work with Grant programs?
- SERD had some ideas to eliminate clawback etc because this makes sense. The Government listened to this and instead solved this problem by cutting grant programs notably taking $800m of uncommitted funds from the Australian Economic Accelerator – a program run to support University spinouts – and $100m from the oversubscribed Industry Growth Grant Program – the only Federal Grant Program focussed on commercialising industry led research. Whilst the CRCP program continues industry applicants need University partners and is not the same. There is a lack of State and Federal business grant programs (outside Net Zero and the MRFF for medical research). The Budget in this case took with both hands from industry support. Budget FAIL.
What is the Net Result?
This Budget is not SME friendly. SME’s are the backbone of the economy. They employ most people and take risks to grow often over a decade+. Entrepreneurs should be heavily rewarded in terms of CGT and exit benefits given the risks. Building businesses has nothing to do with intergenerational equity or comparing outcomes with salary-earners. A false comparison. Logic FAIL.
- Budget FAIL.
What is the chance these changes will be legislated?
- Parliamentary business is a game full of little deals and trade-offs. You can make your own judgment about their utility and who they benefit. Who knows what deals might be done to pass these changes if they survive Senate Committee Scrutiny. Initial reactions from my network suggest few are content and many a little frustrated. Budget FAIL.