Strategic Examination of Research and Development: discussion paper

Level 1, 72 Campbell St Surry Hills NSW 2010
PO Box 859 Darlinghurst NSW 1300
W mjassociates.com.au
T 02 9810 7211

11 April 2025

Strategic Engagement of Research and Development Secretariat

Delivered via email to: RDReview@industry.gov.au

Dear Sir/Madam,

Submission to the Strategic Engagement of Research and Development Secretariat

The Australian Government has commissioned a strategic examination of Australia’s research and development (R&D) system.
Michael Johnson Associates Pty Ltd (MJA) is delighted to have the opportunity to make this submission to the Strategic Engagement of Research and Development (SERD) Secretariat.
MJA understands that an independent expert panel is leading the examination. The panel is exploring how Australia can encourage more home-grown ideas, more research, and more translation, resulting in benefits and prosperity for all Australians for decades to come.
The panel is considering opportunities in line with the Terms of Reference to:
• maximise the value of existing investment in R&D
• strengthen linkages between research and industry
• support the achievement of national priorities
• drive greater R&D investment by industry and boost innovation
• uplift Australia’s overall R&D intensity.
The panel will also consider:
• recent and ongoing reviews by Australian governments around our research, innovation and
productivity performance
• First Nations knowledge, knowledge systems and leadership.
This submission will focus on the Research & Development Tax Incentive (RDTI) and the reasons behind current concerns that the program is playing a shrinking role in supporting Australian private sector innovation at the exact time that the SERD Review is articulating ambitious growth targets for
Australian R&D.

It advocates for immediate reform regarding two key aspects of the program in order to restore the RDTI to a central role in Federal Government support for innovation. It also recommends a timely review of the settings and features of the RDTI to ensure they remain relevant and offer real incentive to the Australian innovation economy without jettisoning the greatest strength of the program – unchanged definitions of R&D activities and R&D expenditures since 2011.

ABN: 65 003 644 657 Sydney | Melbourne | Brisbane
About MJA
Established in 1983, MJA is a professional services firm that specialises in assisting Australian companies in accessing Federal Government support programs for innovation with a particular focus on the RDTI. Our specialist team of engineers, scientists, tax experts and lawyers have extensive hands-on experience in the preparation of RDTI claims Australia-wide and our team understands exactly how client technology links to the RTDI rules.

MJA currently services over 150 organisations operating in all Australian states and territories. These organisations range in size from small start-ups to ASX Top 100 listed companies. Since the R&D tax rules commenced in 1985, we have prepared claims in all sectors ranging from manufacturing, information technology, telecommunications, biotechnology, mining and fast-moving consumer goods.

MJA is recognised as a thought leader in this field and we have genuine relationships with the relevant government bodies including the Department of Industry, Science and Resources (DISR), AusIndustry,
Treasury and the Australian Taxation Office (ATO). MJA was instrumental in the consultation process in setting up the R&D Tax Concession (the Concession) program back in 1985 and we have continued this tradition through our participation in the 2008 National Innovation Review and the 2009 to 2011
RDTI design process.

In 2011, MJA became a founding member of the Federal Government’s RDTI National Reference
Group (NRG). The NRG provided key stakeholders and administrators with a forum for the identification, prioritisation and discussion of views on significant technical and administrative issues relating to the RDTI.

In 2019, the NRG was replaced with the RDTI Roundtable and MJA Chair, Kris Gale, was invited to be a founding member. Kris has advised Australian companies regarding R&D tax legislation since 1987 and, as such, he is believed to be the longest-serving consultant in this area. MJA’s current Managing
Partner, Sarah Lander, assumed Kris’ position on the RDTI Roundtable in 2022.

Our academic credibility is reflected by the fact that MJA is responsible for writing the CCH Master Tax
Guide on the RDTI.

Beyond the RDTI, MJA has consulted extensively in a range of other Federal Government innovation and venture capital programs including the Early Stage Innovation Company (ESIC) initiative as well as working with a diverse range of organisations on the best ways to capitalise on the advantages offered by innovation.

What is the Role of the RDTI in the SERD?
It is commonly accepted that the Federal Government’s four major planks of support for the Australian innovation process are as follows:

• R&D Tax Incentive (RDTI)

• National Reconstruction Fund (NRF)

• Industry Growth Program

• Co-operative Research Centres (CRC) Program

While the SERD Discussion Paper (Strategic Examination of R&D discussion paper) makes no specific mention of the RDTI, it is inevitable that the program will be placed under scrutiny in the SERD Review
as it has now played a key role in the Federal Government’s support for innovation for forty years since the enacting of the Concession in 1985.

Given MJA is principally concerned with the RDTI, we will confine our contribution to the SERD Review to matters concerning the RDTI and the role it does and could play in achieving the aim stated by the
Chair of SERD’s Independent Expert Panel, Ms Robyn Denholm, of at least doubling Australia’s R&D investment level of 1.68 per cent before the end of 2030. (R&D spend needs to 'at least double', Robyn
Denholm says)

Why is the RDTI Slowing Down?
The 2025/26 Federal Budget Papers announced that RDTI payments will drop $640.6 million by 2028-
29, reflecting what the Government says is “lower-than-expected numbers of claims”. It is a radical reversal of the estimates contained in last year’s Budget, which forecast RDTI payments would climb by $2.6 billion between 2023/24 and 2027/28.

As such, MJA submits that the SERD is extremely well timed as there is an accumulation of issues that urgently require attention if the RDTI is to play a key role in future private sector R&D and will enable the story to be changed to being one about a meaningful increase in spending on innovation activity.

A recent article in InnovationAus on 8 April 2025 (Declining R&D Tax Incentive payments are a mystery and a worry) enumerated a number of factors that may behind the big turnaround in projected RDTI expenditure. We will provide brief commentary on these where we can:

• Unannounced future tightening of eligibility criteria

The clearest strength in the RDTI is that the definition of eligible R&D activities and
expenditures have not changed since their enactment in 2011. A tightening of the
interpretations of the definitions will not assist in the growth of private sector innovation.

• Previous errors in the forecasting methodology adopted

• Reduction in ‘bad actors’

MJA acknowledges that the program has seen a high variation in the quality of service provision
and in the aptitude of taxpayers, particularly when they are seeking to self-prepare claims.

We have long been an advocate for a strong focus on the development of mechanisms whereby
these areas can be improved and the Government must remain forever vigilant. However,
almost fifteen years into a now well-established program, we do not think improvements in this
regard will be a significant factor in the reported drop in projected expenditure.

• The exclusion of gambling and tobacco firms announced in the 2024 Mid-Year Economic and
Fiscal Outlook

The ATO’s 2021/22 RDTI Transparency Report (R&D tax incentive transparency reports |
Australian Taxation Office) revealed significant claims in these two sectors but their removal
only goes a small way to explaining the predicted fall.

MJA looks forward to seeing the draft legislative provisions that seek to effect these changes as
we believe there is a debate to be had here. The introduction of a ‘moral’ element to the RDTI,
whose reputation has been built on it being regarded as technologically agnostic, needs to be
very carefully considered as there are ‘floodgates’ arguments that will need to be taken into
account.

• A concern that there is a protracted decline in advanced manufacturing claims

A potential decline in advanced manufacturing is an area highlighted by Emeritus Professor Roy
Green who is a special advisor on innovation at the University of Technology Sydney: “In
Australia, as elsewhere in the world, advanced manufacturing is the main source of business
R&D and the driver of economic complexity.” (Declining R&D Tax Incentive payments are a
mystery and a worry)

Examining the 2025/26 Budget Papers suggest that the decline may be elsewhere as there is a
budgeted increase for RDTI claims within the mining, manufacturing, and construction sector
but the RDTI’s ability to build Australia’s capacity in this regard needs to be carefully looked at
as it offers Australia a genuine opportunity based on comparative advantage.

MJA submits that all of the factors enumerated above have merit and need to be considered.

However, MJA believes that there are two other more critical factors that require immediate attention and reform in order to restore the RDTI to a central role in Federal Government support for innovation.

These will be addressed in the following section of this submission.

How the RDTI Can Deliver on the SERD Targets - A Tale Of Two Regulators and the Big End Of
Town
MJA submits that there are two areas of the RDTI requiring immediate attention and reform so that the
RDTI can make a more meaningful contribution to SERD’s R&D growth aspirations:

• Reinvigoration of Large Company Participation

• Restoration of the Dual Agency Delivery Model

Reinvigoration of Large Company Participation

In the interview with SERD Independent Panel Chair, Robyn Denholm, refenced earlier in this submission, she indicated a desire to see the “big end of town” play a much more active role, arguing that startups alone “can’t make the gap unless we increase by a factor if [sic] hundreds the amount of
R&D spending”.

The declining contribution of large firms is a direct reflection of the shift in claiming activity that has seen the majority of growth in the RDTI in recent years connected to the 43.5% Refundable R&D Tax
Offset (company groups less than $20 million turnover), as opposed to the 38.5% Non-Refundable
R&D Tax Offset (company groups less than $20 million turnover).

In fact, MJA believes that the relevance of the RDTI to large corporations has been in continuous decline since the Coalition legislated the $100 million claim cap in early 2015. For the largest innovation spenders that Ms Denholm is seeking to incentivise, this cap provided a hard limit on the support provided and it represented a massive drop in the support available.

MJA’s experience has been that large spenders ceased factoring the RDTI into investment decisions, both individually and collaboratively, and began to approach claiming as a compliance task that could only deliver a maximum after-tax benefit of $8.5 million. As a result, the RDTI was no longer a priority in
decision making at a boardroom level with many organisations now seeing it as simply a pat on the back from government for being a significant R&D spender.

Turning to the first RDTI Tax Transparency report (R&D tax incentive transparency reports | Australian
Taxation Office), while not being a completely comprehensive review of all participants, it revealed that, by 2021/22, only three taxpayers with a 30 June year end exceeded the cap with the tenth ranked spender only claiming around $50 million. It is clear that the strong signal sent by the 2015 cap has resonated throughout the large corporate community for the past decade. Furthermore, the extension of the cap to $150 million, effective 1 July 2021, is difficult to assess from just the one year’s data provided in the report but it was only met by one taxpayer disclosed in the Tax Transparency report.

The diminished relevance of the RDTI to the “big end of town” was exacerbated by the large cut to the
Non Refundable R&D Tax Offset announced in the 2018 Budget. The head rate was to be reduced to
34.5%, an effective level of assistance that would have been the death knell of the program when the after-tax benefit available was compared to the compliance cost. The range of additional ‘R&D intensity’ benefits announced at the same time made little sense in terms of R&D investment decision-making
(as indeed does the intensity option ultimately legislated in 2021). While ultimately abandoned in
October 2020, the three years of attenuated uncertainty added to the impact of the 2015 cap and large company confidence in the program was severely eroded.

When you add in the uncertain regulatory picture referenced immediately below and other taxation matters such as thin capitalisation rules and imputations, the short answer is that the RDTI has disappeared from the radar of many large Australian organisations. And when the incentive and associated cultural recognition is not there, the desired behaviour inevitably falls away.
We used to see true organisational responses to the program such as R&D conferences and company- wide results sharing but this no longer occurs in our experience.

The RDTI works when it’s valuable enough and simple enough. This should not be forgotten by the
Independent Panel when they go about their deliberations.

Our concluding remarks advocate for a comprehensive design and operation review of the RDTI as a direct consequence of the SERD. The interests of large companies should be front and centre in that exercise and not be the subject to the predictable discredited assertion that they will do R&D anyway.
The statistics suggest that they won’t in large measures.

Restoration of the Dual Agency Delivery Model

MJA submits that the RDTI has entered a period of profound uncertainty surrounding the delivery by the two program regulators: AusIndustry (who apparently now wish to be referred to as DISR) and the
ATO. The uncertainty ranges across messaging, published guidance, taxpayer engagement (including audits and risk reviews) and stakeholder communication.

Such uncertainty is not uncommon in MJA’s experience. Over the history of the RDTI and the
Concession, we have seen periods of excellent collaboration, settled agreement, polarised views and bitter dispute amongst stakeholders about the intentions, interpretations and mechanics connected with the making of successful claims.

We now wish to highlight some illustrative examples of why we believe there is a feeling of jaundice amongst claimants and legitimate service providers about the current state of program delivery.
We believe steadfastly that these concerns can be addressed and alleviated through meaningful consultation that can be undertaken as a direct result of the SERD. We seek this collaboration in good faith as it is our experience that the vast majority of taxpayers seek to comply with the legislative requirements and this has been the conclusion off every external review of the R&D tax measures. Our assessment is also informed by the fact that claimants are seeking a tax benefit that is optional, not compulsory, to access. To make a claim increases your tax risk. Eligible companies need to be making the decision to claim with genuine confidence that regulators can be relied upon to administer the legislation as it is intended.

We do not discount the corrosive impact of the bad actors that we acknowledged earlier in this submission. But they are in the minority and they should not be the drivers of the approach taken by the regulators in their administration of the RDTI. Bad actors are the aberrant case. Not the dominant one.
Every government review of the RDTI and the Concession has confirmed this. If we want the RDTI to return to its position of long -established prominence and relevance, a great starting point would be for all parties to publicly recognise that fact.

Examples of MJA’s current concerns about the performance of the RDTI regulators include:

• Closure/Restriction of Stakeholder Consultative Mechanisms

Of paramount concern is the abrupt suspension of the peak consultation mechanism, the
RDTI Roundtable, in 2024. There is no timetable for its return and it follows a protracted
period of criticism that the Roundtable was being used by the regulators as an update
service and no meaningful engagement on program issues/concerns was occurring.

In addition, the State Reference Groups appear to have been disbanded and have been
replaced by a single Stakeholder Reference Group (SRG), addressing a broader corporate
audience. Again, there is a widespread belief that the SRG is essentially providing basic
information and the perspectives of the regulators with opportunities for consultation kept to a
bare minimum.

• Ineffective Published Guidance Materials and Resources
The published regulator guidance materials are the source of much criticism in terms of aspects
such as the heavy emphasis on compliance concerns that prevent claims (ie. a focus on what
can’t be claimed as opposed to what can be), their repetitive nature, the lack of useful examples
and their opaque design.

A lay business seeking guidance on what to claim is presented with a wealth of material on
what does not qualify and is provided with little insight as to what behaviour is incentivised and
how to practically make use of the RDTI in its operations. The RDTI is not portrayed as an
incentive but, rather, as a tax compliance matter that has many attenuated compliance risks.

In the current market, the role of supporting documentation is attracting increasing attention in
audit activity without exemplars being provided to the claiming community in the online
resources. Longstanding questions such as acceptable methodologies for the apportionment of
overhead expenditure remain unresolved as promised guidance does not materialise. Online
webinars are repetitive in content and are steadfastly pitched at the entry level so more
sophisticated matters remain unexplored.
To give one example, a recent decision by the new Administrative Review Tribunal (ART), Body
By Michael Pty Ltd and Industry Innovation and Science Australia
(https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/ARTA/2025/44.html), agreed with the
Industry Innovation Science Australia (IISA) Board’s disallowing of an R&D tax claim. It also
provided a wealth of useful analysis of matters pertaining to the role of supporting
documentation and areas where DISR needed to refine and improve its approach to interpreting
the legislative requirements of the RDTI. MJA believes there was much to learn from the
decision and the case could have driven a very meaningful dialogue about the program.

However, when DISR’s R&D Tax Incentive Insider Newsletter was published on 25 February,
2025, the following comment appeared: “This decision supports the Department of Industry,
Science and Resources’ approach to assessment of eligible activities.” (R&D Tax Incentive
Insider - February Edition)

It was a demoralising outcome. There is a real difference between a statement that the decision
supported the outcome and a statement that says the decision supported the approach. In
reality, the ART report delivered some excellent critique about DISR’s approach that could have
formed the basis for a valuable dialogue between stakeholders on key aspects. Instead, the
case was effectively shut down. We also note that a case summary is yet to appear on DISR’s
website almost three months after the report was published.

It is too often the case that the government’s voice regarding the program is usually reflected
when taxpayer alerts have been issued or if the government wins a court decision. When the
government loses a case, it’s radio silence. Yet these decisions are equally important in helping
all the market, including DISR and the ATO, better understand how to use the program legally
and effectively. The government’s voice has been way too muted for far too long and we need
to flip the emphasis. Good stories and commercial guidance should be given due prominence,
and the call needs to be that we want Australian companies maximising their RDTI entitlements
and adding to the national R&D stock.

• Uncertain Status Of Taxpayer Engagement Mechanisms including Risk Reviews and Audits
In 2023, the regulators commenced a Random Audit Program (RAP) which subjected randomly
selected taxpayers to the cost and stress of a full DISR technical audit and ATO financial audit.
The intent of the RAP was to gather information and experiences that would improve the quality
of taxpayer engagement in the risk review and audit environment.

For many of the taxpayers selected, the process ran many months over the identified
timeframe, adding to the burden and disquiet the RAP caused. And, as we head towards the
middle of 2025, there has been no formal reporting of the outcomes of the program back to the
Australian innovation community.

This situation is emblematic of the growing concerns about the intent and execution of the
integrity measures being delivered by both regulators. The market seeks certainty and is met
simply with references to the guidance material which we believe to be well short of what is
required. Risk reviews and audits are being delivered in an inconsistent manner and are starting
to bear little relationship to the published integrity frameworks of both regulators. Information
supplied by taxpayers in support of claims is being rejected without explanation.
Into this uncertain void, rumours and unproductive discourse are becoming rife. In recent times,
there has been public discussion that DISR is now outsourcing R&D activities assessments to
third party legal firms and is communicating with RDTI claimants on the legal letterhead of these
firms. MJA has no first hand experiences of this but, if the practice is occurring, there is nothing
on the official government channels confirming this practice. We believe that this development
represents a fundamental change to the integrity systems that underpin the RDTI and, if they
have been made covertly, this represents unconscionable behaviour.

The above concerns are examples of how regulator performance is severely eroding confidence
in the program as taxpayers become increasingly uncertain as to what qualifies and what claim
processes and documentation will be accepted in support of an R&D tax claim.

And a truism has emerged: if a taxpayer is subject to audit activity by the regulators, it is highly
likely that the taxpayer will cease to participate in the program, irrespective of the outcome.
As that truism becomes increasingly shared in the Australian innovation community, it may be
reflecting a key factor why the forward RDTI projections are trending significantly downwards.

If SERD is to succeed, the current realities and perceptions around the RDTI need to change
immediately. The SERD review is the perfect time to turn this critical ship in the Government’s
R&D support fleet around.

• Both Regulators Have The Power to Decide the Key Question – What is Eligible R&D?

One of the last Administrative Appeals Tribunal cases associated with the RDTI, GQHC and
Commissioner of Taxation [2024] AATA 409
(https://www.austlii.edu.au/cgibin/viewdoc/au/cases/cth/AATA/2024/409.html?context=1;query=
gqhc;mask_path=au/cases/cth/AATA) confirmed the belief that the ATO is only bound by the
IISA Board’s view as to what constitutes eligible R&D activities if the Board has made an official
finding. Absent a finding, the ATO is able to form its own view as to what qualifies as R&D.

Much of this submission has been about a desire for more certainty in the program and this
result has the completely opposite effect. It overturns forty years of accepted practice that DISR
and ATO perform separate functions, suited to their roles, and that this is the approach that
produces the best outcome for taxpayers.

When this issue first came to light, it was addressed by the Board Of Taxation’s R&DTI –
Review of the dual-agency administration model
(https://taxboard.gov.au/sites/taxboard.gov.au/files/2022-03/bot_review_rdti_report.pdf).

MJA participated in this review and supported the Board’s recommendation that the separation
of functions be enshrined, either in legislation or in a proposed RDTI Program Charter. Neither
of these things have occurred and, despite ATO assurances to the contrary, MJA has direct
experience of an increasing blurring of the lines in the roles of the two regulators which means
that a taxpayer may have to deal with either regulator about the eligibility of its R&D activities for
reasons that remain opaque and disconcerting. It may be allowed under the legislation but that
does not mean it constitutes best practice.

Should the ATO wish to assert its ability in this regard, we see no clear pathway whereby they
are obligated to refer any R&D eligibility concerns they have about activities claimed by a
taxpayer to DISR. They can make the decision themselves. While that remains the case, the
administrative foundations upon which the RDTI has operated for almost fifteen years run the
risk of falling completely apart.
If there was one change in the RDTI above all others that MJA would seek endorsement from the SERD, it would be to follow the recommendation of the Board Of Taxation’s 2021 Report to enshrine the separate functions of the ATO and DISR with regards to R&D activities and R&D expenditures.

Recommendation:
A ‘Root & Branch’ Review of the RDTI. (After All, It’s Been 17 Years. Or At Least 10)

Given this overview of some of the concerns with the program including the drift from large company support and the increasing lack of certainty about the roles and practices of the program regulators,
MJA recommends that the SERD be used as a launch pad for a comprehensive review of the
RDTI.

The current 2011 provisions resulted from the 2008 National Innovation Review. The 2021 legislative changes emerged from the ashes of the 2015 National Innovation & Science Agenda and the rejected
2018 Budget announcements. 2008 and, to a degree, 2015 are the two occasions where R&D tax incentives have been the subject of a systemic review.

Now is an excellent time to look at how the RDTI can be made as relevant and valuable as possible to help drive other initiatives anticipated to emerge from the SERD. In this context, MJA does wish to reaffirm its support for the retention of the legislative definitions of R&D activities and R&D expenditures which now have the best part of fifteen years of history, claim practice and case law behind them. If
DISR and the ATO then have clearly split responsibilities for these two areas, the program could then highly leverage off this incredibly stable legislative base.

Among the matters that would merit examination by any review:

• Thresholds – minimum spend; group revenue restrictions
• Refundability Criteria
• Rates Of Support
• Areas of Current Concern for Regulators – overseas entities; payments to associates; excluded
R&D activities
• Tax Technical Issues – imputations; thin capitalisation rules; depreciating assets expenditures
• Integration with tax regimes – domestic; international (eg. the transnational Pillar Two issue
around effective tax rates)
Any review should be guided by a desire for a stronger Australian innovation economy, a commitment to true engagement and a spirit of genuine stakeholder collaboration. MJA would dedicate itself wholeheartedly to its contribution should any such review be commissioned.
Future Contributions

MJA greatly appreciates the opportunity to make this submission to the SERD Secretariat and respectfully wishes to be considered for an invitation to present at any public hearing.

Should you wish to discuss any aspect of the material contained herein, please do not hesitate to contact Kris Gale on 0411 171 596 or kris.gale@mjassociates.com.au

Yours sincerely,

Kris Gale
Chair
Michael Johnson Associates Pty Ltd