The R&D Tax Incentive – Like the Footy Finalists, Take It One Week at A Time

September 2, 2011 by Kris Gale · 2 Comments

A few weeks ago, we were chatting with the tax manager of a large engineering firm about the proliferation of briefing sessions currently being offered regarding the new R&D Tax Credit, to be known from today as the R&D Tax Incentive (the Incentive). We agreed that the whole thing seemed a little early as the Bills hadn’t yet passed and the views of the Government were yet to be heard.

From our perspective, we had attended two Government workshops about the Incentive in August and nothing substantive could be said by the authorities about matters of interpretation as the law was not yet in place. The tax manager went on to say that if the company’s technical staff heard that you may not have a claim if your predominant purpose was commercial, not R&D, a number of them would grab hold of this red card being offered and send themselves off so they didn’t have to help claim an R&D project ever again. We concluded that it would be best to learn a little more about the Incentive rulebook before we launched a whole new strategy for winning in the R&D game.

As we write this MJA Update, the Incentive is waiting patiently for Royal Assent. The word on the street is that this will be achieved around the middle of next week.

The understandable reaction from companies after such a long wait would be to get cracking and attend any briefing session on offer; start assessing what R&D now qualifies and begin installing new identification and costing systems. How else do you win the Grand Final?

Well, as any coach will tell you, you don’t get ahead of yourself, you play each game on its merits, you take the season one week at a time, and a litany of other sporting clichés in devising a successful approach.

And so we believe it should be with your response to the Incentive. Right now, we think that the best thing you can do is keep on doing what you’ve been doing with regards to the R&D Tax Concession. Keep identifying and tracking the same projects and the same costs.

And here’s why.

To Know the Rules, You Must Know the Umpire

You would be aware that the Incentive is to be jointly administered by AusIndustry, the Innovation Australia Board and the ATO. They are the refs and umpires and we all know that we need to work cooperatively with these bodies to achieve an effective transition to the Incentive regime. Right now, it is their views of the operation of the new legislation that we need to reference and understand before we can meaningfully respond as to how the Incentive affects taxpayers. The fact of the matter is that they have yet to publish their interpretations of the rules, let alone blow their whistles. Until they do, MJA believes it is way too premature to be attempting to determine a finalised approach to successfully claiming the Incentive.

As such, we advocate that you retain your current approach to identifying and documenting R&D that is currently eligible under the R&D Tax Concession (the Concession). Ultimately, the narrower definitions of the Incentive will mean that some of your R&D activities and costs that you track may not be eligible, but this can be reconciled towards the end of the first year of the Incentive, by which time the views of the administrators will be much better understood. Remember that nothing substantive about the interpretations of the new rules has been tabled by Government since the second Explanatory Memorandum back in the first half of 2010. If you speak directly to AusIndustry and the ATO at the moment, they can only respond with the fact that they can’t comment as the Bills are not yet law. All the rest of us can do right now is speculate on the impact of matters such as dominant purpose and feedstock and how the Government will interpret these new concepts.

What Is the Schedule for the Rest of the Season?

Through MJA’s membership of the R&D Tax Incentive National Reference Group (NRG), we have come to understand that the planned Government roll out will go along these lines:

A national series of AusIndustry/ATO information briefing sessions which have just been announced for each of the capital cities from mid-September. Click on the link for the dates and to register your attendance. Initial guidance material will accompany these sessions.
A discussion paper entitled “R&D Tax Incentive Guidance Discussion Paper” will be released in late October 2011 and a period of active feedback and comment will follow.
Following the passage of the Regulations and Decision-making Principles, application forms for Advance and Overseas Findings will be released. This should occur before Christmas.
In the first half of 2012, detailed guidance material will be published including sectoral guidelines covering manufacturing, mining, information technology, biotechnology, agribusiness and construction.
The Registration application form is most likely to appear in the New Year.

As you can see, there will be several months to digest the Government’s viewpoints and requirements and the great unanswered questions will finally start to receive some useful answers.

Keeping Your Eyes on the Prize

At the appropriate time, MJA will run a series of free seminars to assist you in preparing to make your first claim. But we only intend to do that when we have something meaningful to discuss. In the interim, we will keep you posted courtesy of this Update. Remember, we want all of your team out there on the R&D paddock with everyone fully committed and enthused. Don’t get them looking for those red cards right now so they can risk taking you out of the game for the ultimate R&D prizes.

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.

Filed under: MJA Update Articles
Tagged: ATO, AusIndustry, Dominant Purpose Test, Feedstock Offset, R&D Tax Concession, R&D Tax Credit, R&D Tax Incentive

R&D Tax Credit finally passed through the Senate

August 23, 2011 by Kris Gale · Comments Off

At 1 pm today, 23 August 2011 the Bills to replace the R&D tax concession with the R&D tax credit finally passed through the Senate. The only successful amendments were those to provide for a quarterly rather than an annual refundable R&D tax credit for SMEs from 1 January 2014, and to amend the start date of the new incentive to 1 July 2011. These amendments will have to be considered by the House of Representatives before receiving Royal Assent.

We do not expect there to be any impediment to the amendments being accepted. Outstanding issues such as the unworkability of the Feedstock provisions remain but MJA will continue to work for a workable solution or amendment.

More information on the details of the new R&D incentive will follow shortly.

Filed under: MJA Update Articles
Tagged: AusIndustry, Feedstock Offset, R&D Tax Credit, The new research and development tax incentive

Alas, poor R&D project, we knew you well

August 19, 2011 by Kris Gale · Comments Off

As we write this current MJA Update, the R&D Tax Credit (the Credit) legislation is (very) patiently awaiting debate in the Senate. We understand that the Bills may go up next Monday (22 August) but, whenever they do, it is expected that they will pass without great difficulty owing to the hard-won support of the Greens. The MJA Update will alert you regarding these events as they occur.

The passage of the Bills had been a long and tortuous one. Most of the heat and light coming from the critics (of which MJA has been one) has been directed at the dramatically revised definition of eligible R&D activities and the changed feedstock provisions. However, an additional concern that is now emerging more clearly is the vast increase in administrative powers connected with the Bills and this was reflected in the recently-tabled Credit Regulations and Decision-making Principles.

MJA has recently had two major interactions with AusIndustry and the Australian Tax Office that have provided an initial insight into the proposed regime for accessing the Credit. We attended a roundtable in Canberra on 12 August as an inaugural member of the R&D Tax Incentive National Reference Group (NRG) and also participated in a Canberra workshop for advisory firms during the previous week.

What we learned was that the first public statements from the program administrators will be made at a series of Australia-wide briefing sessions in September. Detailed guidance material and application forms will be released progressively in the months that follow.

But we were also left with a genuine concern that the program will be one that companies will need to administer on an R&D activities basis, rather than by continuing to utilise the well-understood concept of an R&D project.

You Don’t Know What You’ve Got ‘Til It’s Gone

Since 1985, the R&D Tax Concession has operated with an activities-based definition. However, companies have been able to register, claim and cost their R&D activities on a project basis. This makes perfect sense. Technical people think in terms of projects. Accountants do not cost at an activity level. And the Government has always had the right to “drill down” further to an activity level in an assessment environment. Companies have understood that they need to be able to respond accordingly in respect of selected R&D projects. This is where advisers have played a key role and all parties have acknowledged that it entails a significant amount of additional work.

However, the early indications with respect to the Credit is that taxpayers will need to operate all aspects of their claims on an activities basis from registering through to costing prior to being selected for any audit activity. Currently, the Concession has one type of eligible activity – R&D activities – with the two limbs of ‘systematic, investigative and experimental’ and ‘directly related’. By way of contrast, the Credit has five distinct categories of eligible activities – core R&D activities and four types of supporting activities, all with new concepts attached to them.

At the recent consultations with Government, a draft Advance/Overseas Findings application form was discussed. The form required separate descriptions of all five categories, an indication of which supporting activities supported which core activities and cost estimates for each individual activity.

Now imagine a full registration and project costings schedule on the same basis! Take a very simple example.

Under the Concession, you register an eligible R&D project and describe all the R&D activities under the project heading.

Say 8 people work on that project. You capture their eligible time and submit a claim with the cost of the 8 people identified.

Moving to the Credit, if the project has 10 activities, an activities-based approach will require you to separately describe all 10 activities including identification of the linkages. Then you will need to split the costs of the 8 people across all 10 activities resulting in potentially 80 pieces of cost information.

Same project, same claim, same benefit, exponentially more work. Yet the Credit was meant to be simpler for taxpayers and encourage more SMEs into the program. How’s that again?

There is no doubt that the new law will necessitate that this additional information be provided in an assessment environment and all stakeholders need to work together to make sure that this can be effectively done when required. However such a task should be confined to that part of the self-assessment system involved with audits. Accessing the program at the registration and tax schedule stages must remain on an R&D project basis. We cannot drown a program that is already trending as narrower and more complex in a deluge of paperwork. Government concerns about the level of detail of the information provided and the prevention of fraud must be counter-balanced by administrative convenience and a true sense that this is an incentive program. One should never design a system to better target the minority that misuse it at the expense of the responsible majority and the overall program objectives.

We urge the Government to establish that the law and regulations simply enable them to request activities-based information at appropriate times such as in audit environments rather than compel them to require it at all stages of a claim. Following that, all stakeholders should be engaged to assist in the delivery of a workable approach to help boost Australia’s innovation stocks. Let’s keep the concept of the good ol’ R&D project front and centre. The Australian innovation community cannot afford to see it confined to the pages of history.

Filed under: MJA Update Articles
Tagged: AusIndustry, Government Consultation, R&D Activities, R&D Project, R&D Tax Concession, R&D Tax Credit, R&D Tax Incentive, Registration

Are We There Yet? Are We There Yet? Are We There Yet?

July 7, 2011 by Kris Gale · Comments Off

“If you kids don’t keep quiet, I’ll turn this car around and there will be no Duff Gardens for you!”

Sound familiar? I guess we all have a time where we are the impatient passenger or the beleaguered driver.

Well, it’s no different for those on the R&D Tax Credit bandwagon.

The answer regarding the Credit is, of course, no. We’re not there yet. But now is a good time to review the situation as the entrance gates loom into view.

Flicking the On Switch

The Credit will be available for Australian taxpayers for their first income year from 1 July 2011 onwards. As indicated in a previous MJA Update, the Bill is expected to shortly pass the Senate with cross-bench support. Our current understanding is that the Bill will be introduced by the Minister for Innovation, Industry, Science and Research, Senator Kim Carr, in the week commencing 15 August 2011. The only certain change to the current form of the Bill will be the introduction of quarterly payments for the Refundable Credit from 1 January 2014. But more on that later.

I Need To Change My Systems And I Need To Change Them Now

This Credit has been a long time coming and it’s understandable that companies are anxious to get cracking with training and shiny new systems. We counsel against this. We have been dealing closely with AusIndustry and the Australian Tax Office (ATO) in recent weeks and it is fair to say that detailed guidelines for the new program are several months away. Further, there may well be revisions to the scope and operation of certain aspects of the program such as the feedstock provisions. That currently leaves us with the legislation and an Explanatory Memorandum of somewhat dubious quality. And a whole stack of questions. Now, we will be resolving to ensure that those questions are fully answered in that guidance material. In the meantime, we suggest that intending claimants continue to operate their current R&D identification systems.

The overall impact of the changes to the definitions of eligible R&D activities and expenditures is likely to preserve the breadth of eligible projects but wind back the extent of expenditures that attract the support. As such, we strongly recommend that you continue with your current approach and then review what proportion of your documented claim qualifies as the rules of the Credit begin to be fleshed out. MJA will be running briefing seminars when real flesh is on the bones. Right now, information sessions would be interesting speculative exercises but nothing definitive can be said. We hate to put it this way but we need to wait until we see the (Government) paperwork.

What Was That Again About Quarterly Payments?

It has been somewhat bemusing to observe the excitement being generated in some quarters about Senator Carr’s announcement that the 45% Refundable Offset will be available in a quarterly payment form. Bemusing because it was a proposal initially suggested in the Cutler Report that was quickly dismissed as being totally unworkable. Even more bemusing in terms of the fact that, after a National innovation System review that began three and a half years ago, we have to wait another two and a half years for this feature to activate. No explanation has been offered about why we have to wait so long or how the system might work. Yet some are heralding this announcement as a triumph. Talk about your delayed gratification!

Diving into the blogosphere on this question about the delayed start date turned up two explanations – the system would take that long to design or someone might be having a lend of us. We’ll leave you to draw your own conclusion on that one.

Letters From The Front

We will be moving shortly into a detailed series of consultations with AusIndustry and the ATO regarding the design of the Credit and new features such as Advance Findings and sectoral guidelines. We will keep you fully informed of all developments as they happen in this new chapter in Australian innovation.

Filed under: MJA Update Articles
Tagged: Cutler Review, Government Consultation, Innovation, National Innovation System Review, R&D Tax Concession, R&D Tax Credit, Senator Kim Carr

MJA on Switzer

June 28, 2011 by Kris Gale · Comments Off

Kris Gale, Managing Director of Michael Johnson Associates, is appearing on “Switzer” this Wednesday to discuss the imminent R&D Tax Credit.

The show airs between 7.00pm and 8.00pm on Sky News Business Channel. The interview is also likely to be subsequently posted at www.skynews.com.au

Should you wish to discuss the R&D Tax Credit 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.

Filed under: MJA Update Articles
Tagged: Kris Gale, Michael Johnson Associates, R&D Tax Credit, Sky News Business Channel, Switzer