R&D Tax Credit – Is It “Groundhog Day” All Over Again?
If you have been following the debate surrounding the re-introduction of the R&D Tax Credit (the Credit) legislation to Parliament, you’d be forgiven for feeling a little bit like Bill Murray’s character in the movie, “Groundhog Day”. You’d swear that you had already heard all this before.
And it can all get a little bit annoying for everyone having to restate their positions one more time. Just like Bill having to have the same conversation with his old buddy, Ned Ryerson, who accosts him in the street at the same place at the same time each day in the film. (You remember “Needlenose” Ned. He did the whistling belly-button trick at the high school talent show.) You might even want to follow Bill’s lead and punch the Credit right on the needlenose.
Of course, we would never advocate such an approach even if we sneakingly admired your passion. However, we do encourage you to take a deep breath, review the situation and then stay involved in the development of this critical piece of legislation for Australia’s future. With your support, we believe that the Government can hit all its policy marks without any of the radical changes contained in the legislation being necessary.
Spot the Differences
The first thing to note is there are some differences from the Bills that failed to get to the Senate in June.
The law is now attempting to be applied retrospectively from 1 July 2010. There have been two minor amendments to the Object Clause and the definition of Core R&D Activities. And there is the small matter of a minority government where passage through the Lower House is no longer a given.
Yet the Bills remain unchanged beyond that so, at the risk of going over old ground (hogs), we would like to restate the key issues as we see them. And, if like me, you have been knocking on the doors of the Independents without much result so far, it would be good to get a refresher as the Bills head towards a vote just in case you get a few minutes with one or more of the cross-benchers in your travels.
At the minute, we see everyone zeroing in on amendments to make the Bills more palatable and this is a usual political reality. It’s worth taking a step back to look at the big picture to challenge whether the sweeping changes are justified at all and whether there is another way to preserve the institutional understanding and achievements surrounding the R&D Tax Concession (the Concession).
First Cab off The Rank
The attempt to make the Bills retrospective should be dropped. Tax professionals assure us that retrospective application would be a poor move in terms of good tax practice. Further, companies need a transition into a new R&D tax regime. If it was announced immediately that the commencement date was 1 July 2011, this would allow the establishment of an independent consultation process to seek improvements in the proposed laws, followed by the pre-release of administrative guidelines so that all parties could hit the ground running in the new tax year. We support the Australian Industry Group’s call for the Board Of Taxation to head up an independent, timely consultation.
We’re Closer than You Think
Consultation, enactment and transition could easily occur in the next 8 months as there is widespread agreement on many of the main features of the Credit. There is no apparent opposition to the move from a concession to a credit format, the closure of the 175% Premium provisions and the introduction of foreign-owned IP. The disagreements all stem from the proposed changes to definitions of activities and expenditure that resulted from the Treasury consultations last year.
What’s The Headline Problem Again?
The fundamental rewrite of the definition of R&D activities and associated expenditure provisions has been justified by the Government on the basis that the program needs to remain revenue neutral going forward for the next 4 years and that only “genuine” R&D be eligible.
There are two concerns that this raises.
Firstly, the need to make these changes at all has not been supported by the release of any economic modelling by the Treasury. MJA has submitted that we believe that the cost imposts of higher base rates and foreign-owned IP will be more than offset by the closure of the incremental provisions. Given the Government has conceded that the new rules restrict the claims of existing taxpayers by 20% (with many commentators estimating a figure closer to 50-70%), it is difficult to conceive of where the required flood of new claimants will come from to leave the program costing the same. In the absence of modelling, the case for change has not been proven.
Secondly, assuming the case could be established, the Government has refused to be engaged on any alternative solutions that could deliver a revenue neutral outcome that would avoid the need to change the rules for ALL claimants, be they new or existing.
Many large corporates and their industry associations have indicated that they would be prepared to negotiate a group claim cap if they can be shown that further cost control is necessary. If the cost gap could be proved, then historical claim data would enable a reviewable group claim cap to be set to limit the amount of benefit these groups could derive each year. This would achieve the revenue neutral outcome without the need to change the current rules for the SMEs that are the Government’s priority with the Credit. And it would avoid the clear inference in the Explanatory Memorandum that large resource and manufacturing concerns do R&D that is somehow not as “genuine” as their SME brethren.
In essence, the big end of town is saying that we will accept a cap along with a lower base rate and no access to refundability if we can be shown the need for the cap based on the numbers. This would allow everyone to move on from the negative views that have been expressed about “whole of project” claims and supposed misuses of the Concession.
It seems like a sweet deal and I think the Government needs to be challenged on why it won’t discuss this offer.
Getting To the Final Reel
Politics being politics, we appreciate that the Bills may end up being the subject of passage by amendments and MJA will continue to do all it can to assist in tackling the issues of dominant purpose, feedstock expenditure and administrative power.
Today, however, we want to have a final crack at getting everyone back to the table to review whether all the myriad changes and complexities of the Bills might be avoided by a pretty straightforward negotiation and agreement.
A truly independent, focused consultation might just lead us to all want to give Ned a big hug rather than a punch on his needlenose.
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.
R&D Tax Credit Bill Reintroduced
The R&D Tax Credit has been reintroduced in the first sitting of the new Federal Parliament.
Senator Kim Carr’s press release summarising the Government’s position may be found at this link: INTRODUCTION OF THE R&D TAX CREDIT.
It contains two minor amendments from the previous version and all the main concerns we have previously expressed remain.
Two key issues are the attempt to make the legislation retrospective by applying a start date of 1 July 2010 and the voting intention of the Independent Members, Tony Windsor and Rob Oakeshott, who voted against the previous version of the Bill in June.
We will be in contact shortly with a primer on the issues and some suggestions for the way ahead. So it’s not just two Grand Finals that you have to look forward to!
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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