R&D Tax Credit –The Clock Is Ticking, The Engine Is Revving
As the proposed commencement date of 1 July 2010 draws ever nearer, the process by which the Federal Government is seeking to kick start the new R&D Tax Credit (the Credit) continues to accelerate at an alarming rate. You can hear the clock ticking and the engine revving from here.
Following the 19 April close date for public submissions regarding the Second Exposure Draft, the Bills and Explanatory Memorandum (EM) were introduced into Parliament on 13 May in advance of any submissions appearing on the Treasury website. The Bills and EM contained the new feedstock provisions which were not made available in the Second Exposure Draft along with some significant changes in areas such as the examples used to explain the definition of R&D and the rules surrounding the grouping provisions. The EM also contained several erroneous technical references to the Bills.
Main Issues With the Proposed Legislation
The majority of the legislation and the EM was consistent with the Second Exposure Draft but, as indicated above, there were some significant changes. Of greatest concern are the feedstock provisions. Treasury is maintaining that there has been a simple rewrite and consolidation of the existing provisions. This is patently not the case as the new provisions extend the notion of feedstock inputs in an uncertain manner, apply the offset to depreciating asset expenditure for the first time and change the point of required calculation from the feedstock output to an assessment of the value of the contribution of the R&D to the marketable output. This last point transforms the calculation from a single year to a multiple year process and introduces a level of potential complexity that may not be able to be resolved in some circumstances. The overall impact of the new provisions is not far from the deleterious impacts on claims associated with the ‘augmented feedstock rule’ abandoned following the outcry after the release of the First Exposure Draft.
The other major problem lies with the final version of the examples used in the EM to explain the definition of R&D. A series of alterations and omissions have been made to the examples in comparison to the revised versions that appeared in the Second Exposure Draft, presumably in response to some of the criticisms received. The result is a series of examples that are internally inconsistent, contradictory and that bear little connection to the real world practicalities of commercial R&D.
MJA has gone to great lengths to detail the problems associated with the above issues in our written submission that has been lodged with the Senate Standing Committee on Economics (the Committee) and our submission is available on request.
Having A Say In The Senate
The Committee was formed rapidly in response to the introduction of the legislation and its public hearings were conducted a mere week later on 20 and 21 May. These hearings actually preceded the closing date for written submissions (28 May) which is unusual in our experience and another likely reflection of the tight turnaround being attempted by the Government.
Kris Gale (20 May) and Melanie Reen (21 May) appeared in front of the Senators. The hearings also provided an opportunity for interested parties to share views more informally over the course of the two days.
The Senators focused on the impact of the changes to the definition of R&D with a particular emphasis on the dominant purpose test and on the issues surrounding the feedstock provisions. Other substantive matters discussed included the existence of so-called “rorts” under the current R&D Tax Concession, the rushed timetable for the introduction of the new legislation and the quality of the consultation process to date.
One key theme to emerge at the hearings was the fact that the proposed restrictions will extend beyond the claims of miners and civil engineers. A series of manufacturing companies appeared in front of the Committee and all argued that they would no longer be able to claim much of their production-based R&D under the proposed rules. One major company estimated that its claims would be reduced by around 80%
Consistent with the written submissions made available at previous stages of the consultative process, there was a strong coincidence of expressed viewpoints amongst the companies, industry bodies and advisers. All those who appeared pointed to real concerns surrounding the negative impacts that would flow from the introduction of the Credit in its current form. And these views were consistently at odds with the views expressed by the Government’s administrative bodies in the hearings that all the real problems with the Credit had been fixed and the balance of concerns stemmed from misunderstandings.
The Senate needs to resolve the polarised positions by 15 June when it has to deliver its report to the Parliament.
At the heart of this resolution will be assessing the true extent of the restrictive effects of the changes that the Government now admits will occur under the Credit. Treasury made a first-time admission to the Committee that 15-20% of currently-eligible R&D expenditure would be eliminated under the Credit. They did not offer any modelling to assure stakeholders that this shortfall would be made up by new entrants and claims to keep the program revenue neutral. Of course, many other commentators have estimated that the restrictive effect will be much larger. This matter must be resolved before the Credit becomes law.
The Engine Is Revving But Will The Lights Go Green On 1 July?
In order for the Credit to become law, it needs to be passed by 25 June which is only 10 days after the Committee delivers its report. Given the wide range of concerns raised in the Senate hearing, we would be surprised to imagine that the Committee will recommend that the Bills be passed in their current form. In fact, we hear that the Opposition has indicated that it would seek to block passage of the Bills as they currently stand.
MJA has maintained its position that the issues associated with the eligibility of activities and expenditure should be made the subject of a real consultation and that the package should be deferred for a year. Due consideration can be given to sensible constraints on large production-based claims in such a consultation. In the interim, the Government could still introduce the credit regime including the new rates, adjust the software provisions and maintain fiscal restraint by closing the 175% Incremental Concession on 1 July of this year.
We will keep you posted regarding all developments.
In the meantime should you wish to discuss this matter any further, please do not hesitate to contact Kris Gale directly on (02) 9810 7211 or using our contact form to discuss the matters raised in this MJA Update in greater detail.
The R&D Bill read into Parliament today
This morning, in the shadow of the Federal Budget, the Bill to introduce the R&D Tax Credit was read into parliament. This Bill has failed to take on any of the major concerns raised in either consultation phases of the Christmas and Easter drafts, with the possible exception of the augmented feedstock provisions. As such it is largely the Easter draft with a few minor modifications. The Government suggests the following changes have been made:
- changes to the new feedstock provision
- halving of the number of exclusions from core R&D
- revamping of the ‘clawback’ provisions
- removal of the additional ‘knowledge’ from the definition of core R&D
- adjustment to the objects clause
To find the Bills and the Explanatory Memorandum (EM) please click on the words below:
- Bill
- Rates Bill and
- the EM
We understand the Senate process will commence shortly and you can follow the Bills progress here. We will also send further updates with any news and we will be in touch soon with a more detailed analysis of the Bill.
Should you wish to discuss this matter any further, please do not hesitate to contact Kris Gale directly on (02) 9810 7211 or using our contact form to discuss the matters raised in this MJA Update in greater detail.
- The R&D Tax Incentive – Like the Footy Finalists, Take It One Week at A Time
- R&D Tax Credit finally passed through the Senate
- Alas, poor R&D project, we knew you well
- Are We There Yet? Are We There Yet? Are We There Yet?
- MJA on Switzer
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