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R&D tax credits to offer higher rates of benefit to broader range of companies

MJA’s Managing Director, Kris Gale, was invited to attend a budget lock down hosted by the Minister for Innovation, Industry, Science and Research, Senator Kim Carr and the Minister for Small Business, Craig Emerson. The highlight was the announcement of a new R&D tax credit system which, along with a range of other initiatives, is a positive  response to the Cutler Report. At the same time, the government released a new white paper, Powering Ideas: An Innovation Agenda for the 21st Century (PDF).

In an overall sense this is a pro-innovation and pro-business budget

In an economic environment that has required some cuts to some government programs, balanced with appropriate stimulus activities, innovation investment has clearly been recognised  for its economic benefits.

The government has announced an R&D tax credit with two levels of assistance:

• a 45% refundable credit for companies with turnover of less than $20 million (we assume that this will be calculated on a group basis, similar to the current R&D tax offset), equivalent to a 150% tax concession; and
• a 40% non-refundable credit for companies with turnover of more than $20 million and for companies with foreign-owned intellectual property arrangements that conduct R&D in Australia. This is equivalent to a 133% tax concession.

Reacting to these announcements, MJA’s managing director, Kris Gale reflected, “in meeting with Senator Carr, he said he wanted an R&D tax program with ‘winners with no losers’, and that’s essentially what’s been delivered.”

R&D tax credit announcements

The new R&D tax credits take effect for income years commencing after 1 July 2010. Of particular significance, the change to an R&D tax credit system means that the rate of support will be decoupled from the corporate tax rate, whether that increases or decreases in future.

In addition, there will be a review of the program eligibility criteria in developing the new legislation and a consultation paper will be released in the next few months. This is a positive process, and we welcome the fact that changes to eligibility were not a part of tonight’s announcements.

One of the strengths of the current R&D definition is that it is based on industrial concepts of R&D. MJA looks forward to working with government to preserve this critical feature of the program. 

Groups with turnover less than $20 million

Where a group’s annual turnover is less than $20 million, companies will be eligible for a 45% refundable credit. This is equivalent to a 150% tax concession which is double the rate of support currently available under the base 125% program. This is a significant increase, as the current refundable offset has a group turnover limit of $5 million, and Aggregate R&D Expenditure capped at $1 million.

For the R&D tax credit the turnover limit has been increased to $20 million, and the cap abolished.

As a transitional measure, for the 2009/10 income year, the Aggregate R&D Expenditure cap will be lifted to $2 million to provide more support and flexibility for organisations that currently do not qualify.

The government estimates that 5,500 firms will benefit under these new arrangements.

Groups with turnover great than $20 million

Where group turnover is over $20 million, companies will be eligible for a 40% non-refundable credit, equivalent to a 133% tax concession, again one-third higher than the current basic rate of support.

Further, companies conducting R&D in Australia where intellectual property rights are held offshore (as for the current international premium R&D concession) will also able to access this credit.

Reform to existing programs

Both the current 175% premium and international premium will be abolished in line with the introduction of the new credit system, and the 2009/10 income year will be the last for claims under those programs. It appears that the government definitely reacted to feedback that these programs were unpredictable, didn’t dramatically influence new projects or provide a compelling reason to locate foreign-owned R&D in Australia.

No new competitive grants

In an overall sense the value of the support under these announcements is approximately $1.4 billion, however there were no new announcements in relation to competitive grants for R&D. Whilst there are initiatives for other areas (Commonwealth Commercialisation Institute and Clean Energy), there is no replacement for Commercial Ready and no commentary on additional funding for Climate Ready.

This means that discretionary grant-based R&D funds for classic projects appear to be at an end under the current government.

What questions do you have?

It’s always helpful to have your feedback on the articles we prepare, and the approach we’re taking in dealings with the government. This is particularly the case with a time-sensitive announcement such as the outcomes on budget night.

You can help us by filling out a Comment below this article on our website, and giving us any feedback you have on this initial summary of innovation policy as it relates to the 2009/10 federal budget.

If you post a question relevant to the area we’ll do our best to answer it in the more detailed analysis we will be preparing over the next 24 hours.

We will bring you news of the highlights (and any lowlights) as they relate specifically to innovation policy, R&D tax concessions (or credits), grant funding and other government incentives shortly after the lock-up has completed at 7.30pm.

You can look forward to an MJA Update Article and email (if you’re a subscriber) tomorrow night, followed by a more detailed look at the changes within 24 hours of the budget.

Our initial reactions have been written up here: http://mjassociates.com.au/mja-update/budget-2009-innovation-policy-announced/

Each company has 10 months after the end of its financial year to apply for registration under the R&D tax concession (or offset) for the R&D activities it undertook in that year. Registration is a prerequisite to making a claim in the company’s annual tax return.

If you want further information, please review our R&D tax concession services or Contact MJA.

• Minerals Council of Australia submission
• AusIMM pre-budget submission

Both of these submissions provide very good reasoning on why the term “whole of mine” is a dangerous shorthand, and warn the government to be cautious in response to Venturous Australia.

There’s an outline of the presenters, a photo of Kris Gale and the slide deck from my presentation on Day Two.

But, no one is present to interpret English to English, or Spanish to Spanish.

Sometimes you need interpretation even in your native tongue

When the Cutler Review of the National Innovation System published its report Venturous Australia in September 2008, one shorthand phrase in the analysis of the R&D tax concession stood out, the reference to ‘whole of mine’ claims. This is what was recommended:

appropriate measures be taken to heavily constrain ‘whole of mine’ and similar claims against the existing R&D Tax Concession program or proposed Tax Credit program.

Unfortunately, from literally interpreting the phrase, many people think they know what ‘whole of mine’ claims are, but the term has no legislative, policy or administrative meaning. In fact, the government has said nothing about the phrase or policy issue at all.

Yet, we have already started to receive questions from AusIndustry on behalf of Innovation Australia as to whether or not particular projects or claims are ‘whole of mine’ claims.

In one case the applicant has been asked why a claimed project is not a ‘whole of mine’ claim, despite the claim being for a very small fraction of one year’s operating costs.

This is the problem of shorthand, and of administrative decision makers interpreting a policy signal from a review  document.

We need to focus on context for interpretation

In our response to the Cutler Review Report we said:

The term, ‘whole of mine’, has recently emerged as a type of shorthand for describing large claims and needs to be removed from the lexicon of the discussion. It adds an emotive element that clouds discussion as to the role that can be played by a tax instrument in innovation policy. A mythology has been built up around these claims that needs to be moved on from in the current debate.

Large claims are definitely made within these industries from time to time but MJA suggests that this is not routinely the case. Our profiling of our client base suggests that large one-off projects are an occasional feature of large, diversified groups such as mining houses and engineering firms. They make up but one component of their substantial, constantly evolving portfolio of innovation activities. Even when they occur, total R&D claims will invariably fall well below 10% of group turnovers in the relevant years.

This context is critically important. Just because large claims are made they do not necessarily demand further scrutiny. Moreover, many smaller companies, including those in the biotechnology, medical research and software sectors routinely have periods of R&D intensity that equal or exceed those of larger firms.

But you don’t hear an outcry about ‘whole of cure for cancer’ claims.

We need to focus on eligible R&D and eligible expenditures

In either case, ‘whole of mine’ or ‘whole of cure for cancer’, what advisers, government assessors and decision makers need to come back to is an assessment of the principles of eligibility of both the R&D being undertaken and the associated, eligible expenditures.

Under the present rules, R&D is neither more nor less eligible for government support because of the size of the expenditure on the project. This is one of the benefits of having the administration of eligibility of activities separated from the administration of the eligibility of expenditures.

Innovation Australia, in looking at the eligibility of activities, should reach the same outcome as to eligibility regardless of the expenditure involved. In fact, the quantum of expenditure should be irrelevant to the decision making process, and the provision of such information should be optional.

Similarly, the ATO should reach decisions as to the eligibility of expenditures without regard to the nature of the R&D activities undertaken. Whether they assume an activity to be eligible or request assessment of eligibility by Innovation Australia, the outcome should be no different for the taxpayer.

We need an end to the innovation policy vacuum

The Minister for Innovation, Industry, Science and Resources has repeatedly said that “in the twenty-first century, innovation policy is industry policy“. To date, though, most of his actions have been around very traditional industry policy areas: automotive; textile, clothing and footwear; and university research.

The current global financial crisis has affected the speed with which a cogent response to the recommendations of Venturous Australia can be prepared. But if we are going to see a ten year innovation policy announcement from the government it’s going to need some level of consultation and analysis.

Ideally, there will be an opportunity to engage on topics that span policy, politics and administration, as a ten year policy will likely need some level of bipartisan, industry and administrative support to be well received and executed.

Most of all we need fair interpretation for program certainty

It is unfair that applicants for the R&D tax concession need to address a loaded and vague term like ‘whole of mine’ when defending their claims.

It is even more unfair when they need to do so because administrative decision makers are interpreting future policy signals from a government-initiated review of the National Innovation System when there is no policy response.

Just imagine if this level of misinterpretation was at work in the United Nations General Assembly.

Perhaps there would be demand for people to interpret English to English after all!

How are we doing?

It’s always helpful to have your feedback on the articles we prepare, and the approach we’re taking in dealings with the government. You can help us by filling out a Comment below this post on our website, and giving us any feedback you have on how we’re peforming, or how we could improve.

In the last working week of 2008 we received draft guidelines for R&D planning from AusIndustry for discussion. R&D planning has been a requirement of the R&D tax concession since 2001 and is actually part of the definition of R&D activities in the Income Tax Assessment Act 1936.

There are serious deficiencies with the current R&D Planning Guidelines, despite the consultations prior to their introduction, but they have proven to be workable since their introduction.

R&D Planning Should be a “Carrot” not a “Stick”

MJA has a long track record of supporting a component of the R&D tax concession that links R&D activities to business strategy. In fact, our first submissions on this point were made way back in 1995.

Initially, our recommendation was for companies that commit to R&D planning to be rewarded with higher rates of deduction (a “carrot”), rather than the “stick” approach adopted by government. Instead we have a system that rewards form over substance and tends to see R&D plans as a compliance documents, where the absence of a plan can lead to a claim being denied.

And so the government set out, in response to the June 2007 New Elements of the R&D Tax Concession Evaluation Report, to simplify and streamline the R&D planning process.

But “simplified and streamlined” actually increases compliance costs

The government, in requesting feedback on the draft guidelines, said “[t]he draft guidelines are simplified and streamlined in comparison to the existing guidelines”. Whilst this is true in that the document is shorter, implementing the draft guidelines in their current form has the potential to significantly increase compliance costs without delivering any further business value.

Our principal objection to the new planning guidelines is that they force compliance questions about the eligibility of possible, future, planned activities into a rigorous legalistic framework to be addressed in advance of work being undertaken.

Under the current guidelines it is sufficient to outline the program of R&D activities, the intended “Innovation” or “High Levels of Technical Risk” in the activities and the objective of the R&D project. A form was provided, but it was not intended to be prescriptive. These requirements, although favouring form over substance, were sufficient to identify potentially eligible projects (including some that may or may not be undertaken, let alone claimed).

Further proposed changes, dealing with authorisation procedures, estimation of expenditure by planned R&D activity, accompanied by a lack of detail on planning updates and frequency as well as approval of updates means that the changes proposed are far-reaching and affect organisations whether large or small.

If this guideline is approved it is a victory of means over ends; of bureaucracy over business.

MJA Submission on R&D Planning

We have written a detailed submission to goverment on the proposed R&D planning guidelines. You can download a PDF below, together with the proposed R&D planing guideline and see what the issues are.

AusIndustry Draft R&D Planning Guidelines

MJA Submission on Draft R&D Plan Guideines

Although submissions formally closed on 30 January 2009, we suspect that few corporates or other parties will have responded due to the Christmas/New Year break.

If that’s the case, and you want to make a submission to AusIndustry on these guidelines, please forward your comments either by email to rdtaxcon@innovation.gov.au with the heading “Consultation on proposed R&D Plan Guideline” or by post to:

The Manager
R&D Tax Concession Program Management
AusIndustry
GPO Box 9839
Canberra ACT 2601

How are we doing?

It’s always helpful to have your feedback on the Submissions we prepare, and the approach we’re taking in dealings with the government. You can help us by filling out a Comment below this post on our website, and giving us any feedback you have on how we’re peforming, or how we could improve.

Perhaps we can expect more money from government on this program as part of the Venturous Australian response process?