Update on Whole of Mine R&D tax issue
An update on the Whole of Mine issue from the last MJA Update: both the Minerals Council of Australia and the Australian Institute of Mining and Metallurgy (AusIMM) have included this issue in their pre-budget submissions.
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.
New blog post: Venturous Australia: What now? Hargraves Conference 2009
Just published a piece on the excellent Hargraves Conference 2009 over at Innovation is Industry Policy.
There’s an outline of the presenters, a photo of Kris Gale and the slide deck from my presentation on Day Two.
Why ‘whole of mine’ fails the interpretation test
The floor of the United Nations General Assembly buzzes with the languages of its 192 member states.
Yet, as each representative rises to speak in their native tongue, they are confident that what they say will be faithfully interpreted to the balance of the assembly. They understand that a verbatim translation of what is said may make no sense in a foreign tongue, and so rely upon the interpreters to communicate the meaning as best they can. This transfer of meaning is the interpretation test.
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.
Proposed R&D Planning Changes: Good for Government – Bad for Business
R&D Plan Consultation
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.
New blog post: Climate Ready: First round offers are out
New blog post written on Innovation is Industry Policy. It looks like the first round of $27.7m of grants for Climate Ready projects has spent more than one third of the four year budget allocation.
Perhaps we can expect more money from government on this program as part of the Venturous Australian response process?
- 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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