Rebecca Archer
Welcome to Navigating the New Normal – Grant Thornton’s podcast exploring trends in business and the marketplace.
I’m Rebecca Archer and today I am joined by Partner in Innovation Incentives, Rebecca Iwanuscha.
Today we’re exploring the future of government incentive programs and their connection to ESG and sustainability. Businesses can use incentives to drive innovation and show their dedication to sustainability, ultimately contributing to a more environmentally responsible future. They play a crucial role in bringing an organisation’s ambition to life, so how can government incentives help a business align with evolving sustainability objectives and ESG requirements?
Welcome Bec!
Rebecca Iwanuscha
Thanks, Rebecca for having me.
Rebecca Archer
Now, remind us of some key Australian government incentives that are on offer at the moment to support driving this innovation.
Rebecca Iwanuscha
Well, look, in my experience there are really two key mechanisms, I would say, that the Australian Government uses to drive and support innovation in Australia. Firstly, the R&D tax incentive – it's Australia's flagship program to support companies with investing in innovation and R&D, and some of those ESG focused initiatives, really, and it's when they meet those particular requirements of the program.
Roughly 12,000 companies actually claim the R&D tax incentive at the moment each year, and it really directly aligns with the Australian Government's focus on increasing total R&D development in Australia by allowing eligible businesses to access such a great benefit that's above your corporate tax rate, I guess you could say.
Secondly, ESG initiatives underpin a lot of the current government grant programs that are on offer at both state and federal level. There are nearly 3000, I think, government grant programs on offer every year and close to 77 billion in funding – so that's a lot of money we're talking about.
So, these government grant fundings are available to really support businesses in those key priority industries that can really demonstrate and substantiate benefit to an Australian's domestic economy. So ESG initiatives, job creation, export focus, new technologies and capability development are really where these areas for these state and government grants are keen to support.
Rebecca Archer
And what are some examples of the way that these government incentive programs can benefit businesses looking to invest in innovation?
Rebecca Iwanuscha
I love that question. I guess, well, one of the best things is about the R&D tax incentive program is that it's noncompetitive, it's entitlement based, so if you meet the eligibility criteria, you can apply and it can really provide, I guess, eligible companies with a great benefit by offsetting some of the costs you incur on R&D by allowing you to get a tax offset effectively.
So, there are different levels of support that are available and these include a refundable tax offset for companies where their aggregated turnover is below $20m – and just a quick note there – there are some grouping rules that you do need to consider if you're thinking about it, and the refundable offset, basically how it works is it provides a benefit of 18 and a half percent on top of your corporate tax rate, and if you're in tax losses, for example, this can sometimes be received as a cash benefit. So, given cash is king, particularly in the current economic environment, this type of benefit can have a significant impact on businesses as they continue to grow and innovate.
In addition, there's a nonrefundable tax offset for companies who are over that $20m cap threshold. The nonrefundable is a benefit between eight and a half percent and 16 and a half percent on top of your corporate tax rate. So, no cash available under that one, but this offset absolutely can be used to reduce potential tax payable or be carried forward into the future.
And I guess on the government grant side, every grant program operates in a slightly different way. So, by offering varying amounts of money matched funding to government funding, this can range from a few thousand dollars, which is really helpful, but it can get up into the millions, which is really fantastic, and that does depend on the program and the project that you might be undertaking.
Most grant programs are really competitive and allocate a fixed pool of funding between successful applicants. So that's just something to bear in mind. In comparison to the R&D tax incentive also, this can be applied at the end of the year once you've done some of your work, but with government grants they are prospective.
So, my government grants colleagues would kick me if I didn't mention that it's really important that from a grants perspective you consider it early and it's applied at the outset of the project before you actually spend any dollars on a particular project. So, if you're successful, a grant agreement would be issued to you and then your project can commence, and this agreement would actually detail the specific spending requirements that you're required. So, as you can imagine, receiving a government grant though can be a huge game changer to a business and really help elevate their innovation trajectory.
Rebecca Archer
And how does ESG and sustainability tie into programs like the R&D tax incentive or grants, for instance?
Rebecca Iwanuscha
It's probably no surprise to anyone that ESG is absolutely revolutionising the way business operates not just here in Australia, but globally. This change leads to inevitable push for innovation and R&D that really focuses on creating more sustainable, focused and carbon neutral products, processes and services.
So, working in the innovation space, as I do, I'm reminded daily when talking to my clients and when working in industry, the significant relationship that innovation and sustainability have as businesses really need innovation to meet this ever-evolving sustainability standards and I guess meeting customer demands as well for ecofriendly practices.
So as a result, businesses are embracing sustainability as a key driver for innovation. These programs, I guess, are really designed to support business, to take up more innovation, digital and ecofriendly practices and develop new and improved products and services and processes. So, from a sustainability and environmental perspective, I guess these innovation incentives can be leveraged to really accelerate ESG and sustainable initiatives.
So maybe an example could be that if you're planning to invest ESG initiatives into your business, there may be a role for government funding to achieve, I guess, a bigger and better and faster outcome as you're on your plan to do that. So, tax incentives though, can really help drive that sustainable growth and provide those financial benefits in terms of cash refunds, like I mentioned before, or reductions in things like tax, which we don't all like to pay, but absolutely necessary to the economy and to really allow businesses to adapt to environmentally friendly practices as well.
Rebecca Archer
And what opportunities could businesses consider to maximise their government incentives to support their ESG activities?
Rebecca Iwanuscha
Look, I mean, in relation to the R&D program, for example, retaining documentation is really essential to demonstrating eligibility for the program in the event of a review by a regulator, being the ATO or AusIndustry – both government departments.
Examples of these types of documents that could be really useful could include things like emails that we all have every single day, reports that you retain, capitalisation reports, simple things like meeting minutes, any data that you capture, and these are all really crucial to that step.
I guess, where possible, we also really recommend preparing and evidencing your R&D claim in real time – as you go. So, experience for me has proven that this really reduces the pressure on internal teams at the end of the year when you go to consider, is it time to prepare an R&D claim and have you met the criteria? So that's really, I guess, a hot tip, I guess I would say, and it enables you to really maximise any potential benefit that you have when you capture things as you go.
And if I think about government grants, I guess staying up to date can be difficult and time consuming because there are so many grants available out there at both the state and federal level, as I mentioned, and these open and close very quickly, so it's really important to be on top of it. So, I guess engaging a grant specialist like some of those in my team, would be a really useful thing to help you provide ongoing support to identify any potential relevant grants that might match some of those long term projects that you might be planning. So, this can also help really improve the likelihood of success of a grant program as well.
Rebecca Archer
So, we've focused on the sustainability and environmental aspects of ESG and incentives, but what are some of the key governance issues organisations need to be aware of in terms of government incentive programs?
Rebecca Iwanuscha
From a tax perspective, there is an increasing focus on transparency and paying the right amount of tax. I guess in virtue of ESG obligations, taking a transparent approach to tax reporting is important because it gives us a gauge of a company's dedication to its goals and place in society as well. So, businesses can establish confidence and showcase their commitment to sustainability and social responsibility by looking at tax reporting through an ESG perspective. My fellow tax partner and corporate tax colleague Himashini did discuss a little bit of this in part one of our ESG series in podcast, but look, the ATO's focus on tax transparency and tax governance, coupled with these emerging focuses on ESG, means that tax incentives programs like the R&D program that we've been talking about, they're not immune from scrutiny, you know, with the R&D program it's self-assessment. That means that you can be reviewed by the government, by the regulators at any time. So, it is really important to think about what you're putting out there in the governance aspect of when you're applying for these types of programs as well.
Rebecca Archer
And so, on a practical level, what are some of the steps organisations can take to integrate ESG principles into their R&D tax incentive claim, for example?
Rebecca Iwanuscha
I guess as a specialist, I recognise that governance is absolutely a key consideration when you're accessing a program like the incentive for R&D. Failure to be prepared by having your R&D process well documented, could absolutely result in an elevated ATO review, for example. So, it's really important for businesses to start reviewing your existing processes, controls and documentation as a part of your ESG programs for R&D, in anticipation of any increased transparency.
So, one of the key requests from regulators in the event of an R&D review or compliance audit is whether any R&D governance documents actually exist or if the company has any in place. And so such a framework really comes in addition to evidence of whether the company's actually considered the rulings, considered that they're eligible. So that's an ‘in addition to’, so really developing and implementing a specific R&D governance framework is crucial really to demonstrate that the business is considering all of their internal stage processes around the claim that's being made.
I would also suggest that it's important to think about and define the roles and responsibilities of those involved in your R&D claim process, and this is particularly useful as people often come and go from businesses, particularly now, we see that ever growing shift of people movement around different jobs and the market. So having in place an R&D tax governance framework can provide added comfort to say, the board of directors or to an auditor of a business, that there are effective controls and processes in place and those might align with an ESG program as well.
Rebecca Archer
And as ESG incentives and requirements continue to evolve, and of course – they will, and they are – what advice do you have for businesses to stay updated and adapt their innovation strategies accordingly?
Rebecca Iwanuscha
Innovation incentives are constantly evolving, with new government grant programs being announced monthly. And as such, look, I recommend utilising a grant specialist, as I said before, who can really invest the time required that you need to stay up to date with these changes and that long term planning for your strategic intent. This is required, really, so you don't miss out.
But from an R&D perspective, AusIndustry and the ATO also release a number of guidance materials and taxpayer alerts to assist business to make robust R&D claims. So, my recommendation is to frequently review or visit these materials to ensure that your claim is robust and that you're up to date with this information. As I said also, implementing an R&D governance framework; this can be incorporated into the company's broader tax governance policy and procedures as a part of maybe your ESG responsibilities as well. It can be reviewed on an annual basis, and this ensures that it's accurate and considers all of the acceptable guidance and materials that are out there available to companies.
Rebecca Archer
And what about internationally – if we look beyond the domestic market?
Rebecca Iwanuscha
Look, tax incentives in different forms have been, and they continue to be used as a global tool to encourage sustainable growth across all business.
So, from our relationships with our Grant Thornton Global Network, we understand that tax incentives have been successful in a multitude of areas. So, a couple of examples that I can think of is in Italy, where they've introduced a patent box relief that allows for a tax deduction, I think, of 110 per cent of cost related to eligible assets, which is phenomenal. We don't have a similar program here in Australia.
In the Netherlands, there's also tax facilities for investments in environmentally friendly assets and energy savings sustainability initiatives, and these investments can offer deductions up to 45 per cent of these investment costs, which is also really useful to businesses they're looking to invest in ESG initiatives further.
Rebecca Archer
Are you able to provide any insights into the future trends and developments in government funding for innovation? You're in such a prime position to see what's going on – and how can advisors help navigate these changes to drive sustainable growth?
Rebecca Iwanuscha
Yeah, look, I mean, as probably no surprise, innovation incentives and related government policies are all interlinked, and they're impacted by political cycles. So indisputably innovation and R&D are key drivers of economic growth, job creation, and ensuring that Australia really stays relevant when it comes to technology and capabilities for the future, and this is where ESG also has a big role to play.
Sadly, Australia is well below the OECD average in terms of business and public spend on R&D, and what this means is we're falling behind our competitors around the world. So, tax incentives are a potent tool for promoting environmental responsibility and driving the sustainable growth.
We have seen a big push from the government to develop sustainable technologies and support sustainable technologies like decarbonisation of clean energy and improve onshore manufacturing capabilities, which is something that we're constantly trying to do here in Australia. However, there are questions as to whether we're doing enough as a nation to really lift this R&D spend. Currently it's 1.8 per cent of GDP and we're trying to push it to this 3 per cent by 2030, and that's part of the current government's policy.
So, it's absolutely crucial, in my opinion, that we are supercharging R&D and innovation and not just resting on our laurels.
Rebecca Archer
Bec, globally who does this well and who should we be looking toward for perhaps inspiration or to take a leaf out of their book?
Rebecca Iwanuscha
You can look at countries like the UK, for example. They have strong investment in their R&D programs and tax incentives; they have patent box as well; they have a number of government grants. Do they always get it right? No, but look, a lot of European Union countries as well are really taking that next step and investing strongly in R&D and innovation to really push them to the forefront.
Singapore offers really generous benefits in relation to R&D programs in particular, and that's a great driver for a business to want to go there and invest money in Singapore, and so, what we really need to do here in Australia is a similar thing. We need to bring our investment up; we need to encourage business, and so ESG, this conversation around it, rreally impacts that, because lots of businesses are trying to do better. They're trying to do things differently, and ESG is just one way that we can help invest in innovation, and the government can help support that through programs like grants or tax incentives.
Rebecca Archer
You mentioned the political cycles and that the influence that can have on this type of a thing. I wonder, beyond the politics, is there something that we're missing in Australia? Does there need to be an industry-led approach or push, or has that been happening?
Rebecca Iwanuscha
Yeah, it's a great question. It's a tough one to answer. You're right. Political cycles absolutely have a big part of that. The current R&D program, for example, has been in place since 2011 with no changes to the legislation in particular. So, lots of different guidance, but the legislative rules have not changed. So why is it that 12,000 companies is fantastic, but why isn't it more? Why don't we have 100,000 businesses investing and lodging R&D claims? It's a great question. Look, industry absolutely pushes government on this. I work with many different industry groups, listen to them. A lot of them are real key drivers in programs like the R&D incentive or patent boxes that have been raised in the future or government grants, but it seems to be a disconnect between what they're looking for and what we can spend as a nation.
But I also think maybe, Rebecca, the issue is that a lot of companies don't know all these programs that exist, or that it looks too difficult from an administrative point of view, to actually invest money in them, to invest the time to apply for them. So, as I was saying, government grants, there's so many of them out there. How do you find out what you're able to access? And we have fantastic team members here that do that, and we offer different sources to help business with that, but it still seems of, I guess, overwhelming a lot of the time.
So, for me, I think there's a disconnect between what's actually available and everyday businesses that are probably doing R&D or doing innovation or looking at ESG initiatives, don't actually realise that maybe they can access some of these programs and that government funding and benefits are there to support them as well. So maybe we're not actually capturing all of the data of what's actually happening here too.
Rebecca Archer
As always Bec, thank you so much for your invaluable insights. I wonder if you have any final comments or tips around how businesses can best tie innovation and government incentives within their broader ESG goals.
Rebecca Iwanuscha
The key for me is to emphasise the importance of taking ESG business goals and reporting seriously to protect your brand as a business and attract talent and achieve that business growth that everybody's looking for. And secondly, I would absolutely encourage Australian businesses to take that leap of faith and embark on ESG journeys and look at innovation and see what's available to you in terms of incentive programs like the R&D program and like some of the government grants that exist to really accelerate progress and reduce the cost of what you're doing as a business.
Rebecca Archer
Bec, thanks again for your time today. If listeners would like to hear more, get in touch, or find out more about how you might be able to help them specifically, how should they find you?
Rebecca Iwanuscha
So, absolutely, you can get in touch with us via our Grant Thornton Australia website, or you can connect with me on LinkedIn, and I'd be happy to chat to you there.
Rebecca Archer
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