R&D Tax Incentive update: Gambling and Tobacco Companies no longer welcome

In a significant policy shift, the Australian Federal Government has announced that gambling and tobacco companies will no longer be able to access the popular R&D Tax Incentive. The move is indicative of the government seeking to align public funding with societal objectives, reducing indirect subsidies to industries linked to public harm.

The announcement may have been missed by many, arriving one week before Christmas as part of the 2024-25 Mid-Year Economic and Fiscal Outlook (MYEFO). If legislated, the decision will take effect from 1 July 2025.

The R&D Tax Incentive is a vital program that has supported innovation investment by Australian businesses over the last 40 years. Over this time, the program has been equally accessible across all sectors, with eligibility largely determined by activity-based criteria rather than industry affiliation.

As such, this policy change represents the first time the famously ‘industry agnostic’ R&D Tax Incentive will be restricted based on the sector in which a company operates, as opposed to the eligibility of the R&D activities and costs themselves.

The decision is apparently a response to the backlash that accompanied the release of the inaugural ATO R&D Tax Transparency Report in October. The report published details of the companies accessing the R&D Tax Incentive and the 2021-22 R&D expenses claimed. It highlighted that gambling companies in particular are significant beneficiaries of the program with Tabcorp ($39.5mill), Aristocrat ($22.1mill) and Ainsworth Game Technology ($15 million) amongst the top 1% of claimants.

Unsurprisingly, the decision has received criticism from bodies representing or connected to impacted sectors including Responsible Wagering Australia and the Gaming Technologies Association.

Responsible Wagering Australia CEO Kai Cantwell highlights the problems this type of decision represents:

The Government’s announcement sets a dangerous precedent for how tax policy could be misused in the future.

If I represented fast food, alcohol, fossil fuels or any other industry that face similar criticisms, I’d be worried. This cherry-picking approach undermines the neutrality of the tax system and leaves businesses guessing who will be targeted next.

In our view, while there is value in ensuring that government funds are not directly or indirectly contributing to societal harm, knee-jerk and populist responses that dramatically reshape major business support programs such as the R&D Tax Incentive should also be avoided.

Excluding tobacco and gambling companies from Australia’s R&D Tax Incentive is potentially a pivotal moment in the nation's innovation policy. While the immediate impact is confined to these industries, the decision reflects an unexpected policy shift to align a previously sector-neutral program with societal values. The timing of this R&D funding development is also peculiar given the upcoming comprehensive review of Australia’s R&D system.

Hopefully this represents a one-off recalibration of the program following the inaugural R&D Tax Transparency Report. The stability and predictability of the R&D Tax Incentive and its broad-based application are amongst the best attributes of the program and fundamental to its popularity. The prospect of sector-restrictions and the promotion of certain industries over others, as is common with other competitive grant programs, is in our view to be avoided when it comes to the R&D Tax Incentive.

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