Welcome Back My Friends To The Show That Never Ends : The R&D Tax Credit

February 22, 2011 by Kris Gale · Comments Off 

And welcome, albeit belatedly, to 2011. In our first MJA Update of the year, we will look at the comments made by Senator Carr in last Friday’s AFR (click to view) urging for the current R&D Tax Credit Bill (the Bill) to pass through the Senate unmolested in the name of fiscal consolidation. It is possible that the Bill could be presented to the Senate as early as next week.

Thar She Blows!

Senator Carr has urged that the Senate pass the Bill as the current scheme was unsustainable based on new government projections that see the cost of the program blowing out to $2.4 billion in 2012/13. Senator Carr states: “At a time when the government is looking at fiscal consolidation we are maintaining expenditure of R&D, but we can’t sustain that unless there is reform of the system for genuine research and development.”

We welcome the new focus on program cost as a driver of the reforms. It now seems that the Government’s rationale for the proposed regime does include an explicit recognition that the Credit will significantly limit R&D claims owing to the altered definitions of R&D activities and expenditures. The question remains : to achieve the Budget targets, do we need to fundamentally rewrite the eligibility criteria?

Working Without A Net

The new government projections have arrived without any available modelling to test the assumptions. So we are again working without a net but we think that the following may be safely said.

The “blow out” figure must include the 175% Incremental Concession (the Premium) which we have previously shown to be contributing about 30-35% of the cost of the current program. In opposing the definitional changes to R&D activities/expenditures, no-one has called for the retention of the Premium. Any “blow out” attributable to retaining the current definitions will have much of the wind taken from its sails once the closure of the Premium is taken into account in the projections.

We have consistently argued that closing the Premium is likely to completely pay for the higher base rates of the Credit and the introduction of foreign-owned IP claims. We welcome the release of Treasury modelling that shows that further change is necessary either to achieve revenue neutrality or even a degree of fiscal windback.

Let’s Keep It Simple

Let’s assume that the case for further cost control can be made out in the current government spending climate.

There are two simple options that would be saleable in the marketplace that would avoid all the uncertainty and angst associated with the proposed rewrites contained in the Bill:

  1. Introduce a reviewable annual claim cap at the company group level. The cap could be calculated on available claim data and could seek to limit the ability of, say, the top 25-50 claiming groups to access the Credit.
  2. Wind back the proposed rates from 10c/15c to a more modest combination of levels.

Clean and simple. Yet the Government seems unwilling to engage in any dialogue regarding either of these suggestions. This is why so many commentators are concerned that the Bill actually reflects a philosophical shift that seeks to end support for business R&D, introducing a more tightly controlled regime based around supporting business research only.

Now is the time to reignite this debate. With cost control now to the forefront of the discussion, we need to see the Treasury modelling and to explore the above cost-saving alternatives to a fundamental rewrite of the R&D definitions with all the well-documented issues and concerns.

The fact that the current Bill appears to establish a world where the Credit only supports unsuccessful commercial R&D has led many to ask whether the new program contains any real incentive effect at all. This will be the subject of our next MJA Update.

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.

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About Michael Johnson Associates

Founded in 1983, Michael Johnson Associates (MJA) is Australia's leading specialist R&D tax concession firm. We work with organisations of all sizes to help them understand the benefits of a compliance approach to R&D tax concessions and grants.

We know the complex legislation, amendments and guidelines related to government programs inside out - we deal with them every day. We also write the commentary on the R&D tax incentive for the CCH Federal Tax Reporter.

Please contact us on (02) 9810 7211 or via e-mail to see how we can be of help to you.




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