R&D Tax Credit – We’re Not in Kansas Anymore
With memories of the Christmas/New Year break rapidly becoming the stuff of legend, the R&D community is now able to focus on the Draft Bill and Explanatory Materials (released immediately prior to Christmas) that set out the design and operation of the new R&D Tax Credit.
What has become very clear is that the Treasury has delivered a package that fundamentally changes the form of government support for R&D. Should the Bill become law, we will certainly find ourselves in the Land of Oz.
Changes to the Nature of the R&D Tax Benefit
The main surprise with the package is that the “augmented feedstock rule” and related provisions fundamentally alter the nature of the R&D tax benefit. The Bill changes the R&D tax incentive from a largely guaranteed upfront concession at the time R&D expenditure decisions are made to an after-the-fact compensation measure for R&D that fails partially or totally. How all this works is complicated and open-ended and the available benefits can only be calculated after the market value of the R&D can be assessed. Given that companies will plan for most of their R&D to generate a valuable output, they will therefore intend in most cases to not access the Credit, rendering it as a form of relief that will only be considered after the R&D has been completed. If the R&D succeeds, then none of the R&D costs can be recovered except those that relate to conceptual design. In addition, the costs of compliance would not be recoupable so that the result of keeping records for a potential Credit claim would make the R&D more expensive than if the potential Credit had been ignored.
This fundamental change occurs irrespective of the definition of R&D. Of course, the package also significantly restricts what constitutes eligible R&D and radically changes the compliance regime. These changes combine to render the program effectively useless in the commercial R&D marketplace.
The Credit actually rewards failure and has no real role to play in successful R&D. We believe that the introduction of the Credit will reduce government support for R&D to at least 25% of current levels (i.e. $300-400 million per annum cf. the current $1.4 billion). The package does not accord with announced government policy.
MJA is working with industry lobby groups, other advisory firms and its clients to alert the Government to the fact that the Bill does not reflect its announced policy.
In the past week, the responsibility for the package has moved from the Office of the Assistant Treasurer to the Office of the Treasurer. We see this as a direct reflection of the growing awareness in the Government that the announced package has fundamentally changed the character of the R&D tax incentive and is not in line with the Government’s Budget announcement and stated policies. Kris Gale, Managing Director of MJA, is engaging directly with Ministerial representatives to discuss the impacts of the Bill.
Furthermore, MJA has met with officials from the Treasury, the Department of Innovation, Industry, Science and Research and AusIndustry to discuss the matters at hand. We were given an excellent hearing and were able to explain the grave concerns we hold regarding the impact and operation of the changes. We have been given a direct request to provide practical examples of the problems we envisage and it was agreed that these will be treated separately from the public submissions which close on 5 February. We will be responding accordingly and value any input you might wish to provide in this regard.
Moving Forward
MJA will continue to update you regarding this critical issue. We remain committed to addressing the severe shortcomings with the current proposals so that we can all move forward with a valuable and workable R&D incentive to help meet the upcoming technical challenges facing your businesses.
We want something that works for the real Australia rather than for the mythical Land of Oz.
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.
Commercialisation Australia
The Australian Government’s new innovation initiative, Commercialisation Australia, will be open for applications in early January 2010. This program will be administered through the Department of Innovation, Industry, Science and Research. Information and application details are now available from the Commercialisation Australia website www.commercialisationaustralia.gov.au. We will provide further information in our next MJA update.
The R&D Tax Credit Exposure Draft
Has Treasury Given Us What We Always Wanted or Just Another Pair Of Socks?
The Treasury Consultation Paper, The new research and development tax incentive, released in September 2009 was a great disappointment to the Australian R&D community.
How do we know this?
Because 165 submissions to the Treasury were made publicly available and they virtually all rejected the proposal to tighten the definition of R&D.
We then sat back and waited to see Treasury’s response. Well, it arrived last Friday just in time for Christmas in the form of the Exposure Draft of the Tax Laws Amendment (Research and Development) Bill 2010. Naturally, we couldn’t wait a week to see what was inside and so we opened it up, hoping that the views of the community had been heeded. Sad to say, there wasn’t a shiny new toy inside. Rather, a pair of socks was all to be found. And not very colourful ones at that.
The key proposals are detailed below and, while the news is not all bad, the new R&D Tax Credit proposed by the Treasury seeks to legislate a considerable narrower definition of R&D coupled with augmented feedstock provisions that would combine to remove any real incentive effect at the critical phases of all R&D projects – the times where decisions are made as to how much expenditure to commit to a project. Along with this minimised incentive effect, the new legislation introduces a slew of new concepts and requirements that add a huge amount of complexity to the program, couching it in language that is confusing and not relevant to technical personnel and again dropping the responsibility for the claim squarely in the lap of the company’s taxation team.
Ironically, lack of incentive effect and complexity were the very forces that drove the Cutler Review in recommending changes to the current R&D Tax Concession such as the removal of the incremental concession. The proposed new R&D Tax Credit fails in both these regards. In short, it is an incentive designed to encourage companies to do R&D outside their normal operating environments and only reward failures which can only be determined after the fact. It is not interested in assisting companies that seek successful R&D outcomes in commercially-driven environments. As such, the policy drivers expressed in the Exposure Draft become impossible to understand.
The Treasury has given interested parties until 5 February 2010 for responses to be submitted.
Interested parties are invited to comment on the exposure draft legislation and associated explanatory material. While submissions may be lodged electronically or by post, electronic lodgement is preferred. For accessibility reasons, please submit responses sent via email in a Word or RTF format. An additional PDF version may also be submitted.
Address written submissions to:
General Manager
Business Tax Division
The Treasury
Langton Crescent
PARKES ACT 2600
Email: rdtaxcredit@treasury.gov.au
MJA will be making its own submission and is fully available this week and then from January 4 onwards to discuss any questions and concerns that you may have. We will also be liaising with companies and their industry representatives in their direct dialogues with the relevant politicians and their offices. We will keep you updated regularly on progress.
In the meantime, we wish you all the best for the Christmas season and for a very successful 2010.
Here’s hoping that you don’t receive too many more pairs of socks!!
Key Proposals in the Exposure Draft and Explanatory Materials
The release of the Exposure Draft and Explanatory Materials in respect of the Tax Laws Amendment (Research and Development) Bill 2010 confirms the Treasury’s policy intent that first appeared in its September 2009 consultation paper regarding the new R&D Tax Credit. The new incentive will replace the R&D Tax Concession for income years commencing from 1 July 2010 onwards. It is immediately apparent that the draft legislation has paid scant attention to the concerns expressed by the overwhelming majority of Australian stakeholders who responded to the Treasury’s previous paper.
As promised, the proposed amendments to the current R&D Tax Concession legislation will deliver a 45% refundable tax credit to small firms (group turnover less than $20 million per annum) and a 40% credit to companies with a group turnover more than $20 million per annum.
The new program will be extended to support R&D activities undertaken in Australia by foreign-owned firms and the complex 175% premium and international premium concessions will be abolished. Importantly, it will provide better certainty in respect of the level of support by its detachment from the corporate tax rate and through the introduction of an amendment period of 4 years which will be binding on the Commissioner.
Where the proposed new R&D Tax Credit falls short is in its failure to address the drivers that will deliver a meaningful and effective program to stimulate R&D in Australian businesses operating in a commercial environment and within a broad range of industry sectors.
This inherent failure is immediately evident in the revised “Objects” clause which states: The object of this Division is to encourage industry to conduct R&D activities that might otherwise not be conducted because of technical uncertainty, in cases where the knowledge gained is likely to spillover to the benefit of wider Australian economy.
To any company operating in a dynamic, competitive, consumer-driven market within a global context, this statement falls well short of the mark in describing how R&D decisions are made. Any credibility is further eroded by the proposed introduction of a “dominant purpose” test in respect of supporting activities as outlined in the following Objects clause: The tax offset is also available for directly related activities that are conducted for the dominant purpose of supporting such core experimental activities (rather than for a broader commercial or other purpose).
This myopic view of industry R&D will undermine any tax incentive for the conduct of applied research by Australian businesses. Essentially, the program focus will be on the conduct of “research” phase activities and not the “development” phase of activities. This equates to a meaningless incentive for companies (large and small) engaged in process technologies where downstream development costs and risks vastly outweigh the initial research effort involved, especially in manufacturing and mining.
The following is a brief summary of the new legislative elements that will transition the current R&D Tax Concession to the new R&D Tax Credit :
Change to the definition of Research and Development Activities: Claimants will need to qualify activities as either core or supporting. Core activities will need to display considerable novelty and high levels of technical risk. Supporting activities will need to demonstrate that their dominant purpose was to support the core R&D. This will add complexity, greater uncertainty and a heightened compliance burden for most companies.
Restrictions on claim value: A broader list of excluded activities is proposed and the exclusion will apply to these activities irrespective of whether they are core or supporting. Software development has been hit particularly hard with a significant extension of the ‘multiple sale’ requirement along with other new restrictions. New augmented feedstock rules seek to clawback the majority of claimable expenditures wherever the R&D outputs generate value beyond their inherent worth as IP. The proposed feedstock adjustments will require the exclusion of R&D expenditure (currently other than for conceptual design) and depreciation amounts that directly relate to the production of a feedstock output. There is also a concern about the operation of an “expenditure not at risk” exclusion.
Innovation Australia’s role: The proposed amendments to the function of the Innovation Australia Board will provide it with much wider powers in respect of program administration. While R&D plans will no longer form part of the definition of R&D, the amount of information apparently required from companies to ensure registration will impose a severe compliance burden. A mechanism for advance findings regarding R&D eligibility has been announced. The introduction of program fees is also contemplated.
Conclusion
The draft legislation has paid scant attention to the concerns expressed by the overwhelming majority of Australian businesses who responded to the Treasury’s earlier consultation paper. The result is an R&D tax incentive that is far more complex and greatly reduced in value as rather than “simplified and enhanced”.
The deadline for the next round of submissions is Friday 5 February 2010.
The R&D Tax Credit Issues Paper
Window For Responses Is Closing Rapidly
Submissions regarding the Treasury consultation paper, “The new research and development tax incentive”, close on Monday, October 26.
The public consultation sessions were completed in Sydney yesterday. It seems apparent that an Exposure Draft of the legislation is already advanced and is likely to be released next month. This makes submissions vital if you are concerned by the direction taken in the Treasury paper. The time to raise your issues is NOW.
To assist you, MJA is delighted to give you access to our draft submission.
If you would like to see it, reply to this update using our contact form and we will email a copy to you immediately.
Our submission is consistent with the viewpoint expressed in the MJA Updates initially circulated in the wake of the consultation paper. In concluding that the proposals contained in the paper will not result in a less complex and more predictable R&D tax program, our submission makes the following points:
- By proposing to change the definition of R&D activities, the Federal Government is seeking to restrict the breadth of R&D support at the very time that corporate Australia is being asked to lift its R&D effort in areas of vital national significance such as the Carbon Pollution Reduction Scheme and the National Broadband Network
- The Treasury’s case for reform is not made out either in terms of R&D policy or Budget revenue neutrality
- Changing the definition of R&D activities and asking taxpayers to split claims into core and supporting activities will add the single greatest layer of complexity, uncertainty and compliance burden in the history of the program
- Changing the definition disproportionately impacts on SMEs
- The changes will have an immediate negative impact on BERD
In short, the Treasury proposals will result in a much more complicated program and run the risk of severely curtailing R&D support in Australia at a most inopportune time.
We look forward to continuing to share views on this vital matter.
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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 performing, or how we could improve.
So what is the Big Issue in the R&D Tax Credit Issues Paper?
A week in and where are we at?
The past week has been a predictably intense one. The Treasury consultation paper, “The new research and development tax incentive”, has attracted widespread comment, concern and criticism. Some have seen the paper as the harbinger of the end of effective government support for R&D. Others believe that the consultation process is illusory and that the decisions have already been made. MJA has a more tempered view. And it’s a view based on direct dealings with government over the past week.
Kris Gale, Managing Director of MJA, has met with the Treasury and Innovation, Industry, Science and Research officials nominated as the contact points for the consultation process. He is booked in to meet with Senator Carr’s office on Monday, 28 September. He has presented on the topic to three conferences in the last 7 days. Contact has been made with several industry advisory bodies and all members of MJA have been canvassing client companies and other interested third parties for their reactions and views. The month of October will see this program of active engagement continue apace.
Has any good news emerged?
The answer is yes.
The Government officials will reassure stakeholders at the announced public consultation sessions (see details below) that the paper is truly a discussion paper and that the exposure draft of the legislation will take submissions and commentary into direct account.
They have acknowledged that the delay in issuing the paper has placed pressure on the timetable for the delivery of the new legislation and allowances will need to be made. They indicated that the main source of the delay was the fact that the paper spent considerable time in the offices of Senator Carr, Mr Swan and Mr Rudd and that this is a reflection of real ministerial engagement.
Assurances were also given that the ‘additionality and spillovers test’ referred to in Paragraph 48 of the paper will not translate into a legislative requirement and that this will be confirmed at the consultation sessions. Further metrics around the issues raised such as the meaning of a revenue neutral program over the next 4 years will also be provided.
Finally, it is now clear that the Refundable Tax Credit will be available to foreign-owned R&D in contrast to its announced preclusion in the May Budget.
So what is the Big Issue in the paper?
Without doubt, the main concern raised by the paper was the announcement of the fact that the definition of R&D will be changed in order to reduce the expenditure available to be claimed against the Credit. This was deemed necessary to achieve budget outcomes and justified on a policy basis of focusing support on the areas of highest net benefit and redirecting support to the SME sector.
In announcing the changes, the paper curiously made use of the “old school” terminology of core (cf. SIE) and supporting (cf. directly related) activities. It was indicated that core activities will need to contain innovation AND technical risk, rather than just one of these elements. Further, limitations are to be brought in with respect to supporting activities and the paper sought responses to a suggested list of possible restrictions.
In the next fortnight, MJA will circulate its draft response to the paper which will analyse our concerns with this ‘Big Issue’ in detail. However, we would like to take this opportunity to sound the alarm now.
The Government announced on Budget night that the R&D Tax Credit will replace the “complex and outdated” R&D Tax Concession with a
“…simplified R&D Tax Credit which cuts red tape and provides a better incentive for business to invest in research and innovation.”
The Issues Paper makes the case for the Credit delivering a simpler program by highlighting the following:
“Paragraph 9.….Companies will no longer need to distinguish between their base and incremental expenditure on R&D in working out their claim.”
Yet, under the proposed changes, companies will have to distinguish between their core and supporting activities in working out their claim with the direct result of a restricted level of support for supporting activities.
So much for a simpler R&D tax program. Changing the definition of R&D will, by the few strokes of a pen, introduce an unprecedented level of complexity, attendant uncertainty and compliance burden into the program.
The case for definitional change is simply not made out in the paper. No concrete evidence is given. The very thin examples in Attachment A are misleading in their conclusions. No modelling is being offered up to amplify the cost concerns. Given these factors, MJA believes that the Big Issue needs to be thoroughly explored with relevant stakeholders as soon as possible.
If cost control is the political outcome required, MJA believes that the real focus needs to be on reviewing expenditure provisions. Changing the well understood, internationally competitive definition of business R&D will cruel the prospects of all companies involved, whatever industry they are in and whatever their size. In fact, it will be the technology-intensive SMEs who will be hit the most as they are the companies that spend large proportions of their operating budgets on R&D compared with the mature sectors who have the largest claims in numerical dollars but modest claims in terms of proportions of overall operating cost.
It is well known that Australia currently sits on the lower end of OECD Business Expenditure on Research and Development (BERD) comparisons. Changing the definition of claimable R&D along the lines proposed means that we should be expecting snakes not ladders in our BERD future.
MJA will continue its campaign of direct liaison with the Government to explore the issues raised and work towards a negotiated result that promotes a sensible outcome for business innovation policy.
But what can I do?
Make time to attend the upcoming public consultations. Details are below and bookings can be made through the following link Bookings
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** Please Note: Seats are limited. ** |
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Location |
Date and time |
Venue |
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Canberra |
Monday 28 September 2009 |
National Convention Centre |
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Adelaide |
Tuesday 29 September 2009 |
Mercure Grosvenor Hotel |
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Brisbane |
Wednesday 30 September 2009 |
The Sebel & Citigate |
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Perth |
Monday 12 October 2009 |
Rydges Perth Hotel |
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Melbourne |
Friday 16 October 2009 |
Melbourne Convention Exhibition Centre |
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Sydney |
Monday 19 October 2009 |
Sydney Marriott Hotel |
Make a submission. It doesn’t have to be a treatise. It does need to express the concerns that you have and it should set out how the proposed changes would affect you, both good and bad. The aim is to be constructively critical, not destructively so.
In both these matters, don’t rely on your advisers and industry bodies to make all the running this time. You are the Credit’s proposed customers. Your voices are the most influential ones.
And keep talking. Dialogue generates ideas that can then be translated to workable solutions. Please include us in your conversations. We are passionate about effective innovation policy and we would love to hear what you are thinking.
To keep the dabate moving, contact Kris Gale directly on (02) 9810 7211 or using our contact form.
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 performing, or how we could improve.
