If We’re Turning Up The Heat, Let’s Put Feedstock Into The Furnace
As calls continue for the R&D Tax Credit Bills to be put into an independent consultation process as soon as possible so that a workable new R&D Tax Credit can be in place and open for business by 1 July 2011, it is worth remembering that all parties need to appreciate that hammering out a workable definition of R&D activities will mean little unless the concerns regarding the eligibility of feedstock expenditure (along with other issues we have highlighted previously) are resolved at the same time.
The principal concern is that the new provisions are a major extension of the concept of feedstock offsets and, when combined with the narrower definition of R&D activities, result in a drastic reduction in support for any operations-based R&D that generates a commercial value.
Feedstock is a tough one. It’s a bit of a reach for the politicians. The technical bodies – Department of Innovation, Industry, Science and Research; AusIndustry; Innovation Australia Board – all seem to adopt a “not my pigeon, guv” approach. The Senate Committee ran out of puff before it got to feedstock in its report back in May. Financial journos glaze over when you try and explain it to them.
Yet, if we are to believe the Government, feedstock is a non-issue as nothing has supposedly changed regarding the feedstock offset contained in the current R&D Tax Concession and that proposed for the R&D Tax Credit. Bill Shorten, the Assistant Treasurer, in his Lower House speech on November 22 on the Bills said: “The feedstock provisions in the bills have the same scope as the feedstock rule in the existing legislation.” Paul McCullough from Treasury said in his appearance before the May Senate Economics Legislation Committee that he was “aghast” at suggestions that the real problem with the Bills was the feedstock provisions “…because the feedstock provisions are not changing.”
Simply put, MJA disagrees with these two statements. 100%.
The proposed provisions are materially different and their potential scope has greatly expanded.
In summary, the two main differences are as follows:
Scope
Concession – The adjustment applies to the cost of all goods or materials transformed or processed in R&D activities if they are inputs made into saleable goods.
Credit – The adjustment applies to the cost of all goods or materials transformed or processed in R&D activities.
Calculation Methodology
Concession – Exclude feedstock inputs on production trials and only add back the loss if the production trial fails to make profitable outputs via a single adjustment at the conclusion of the trial.
Credit – Always include feedstock inputs but make multiple adjustments to exclude the inputs based on each and every final sale connected with the production trial whenever they occur.
The credit process is a reversal of the current calculation methodology and is vastly more complicated. The adjustments may be required years after the R&D occurs and at points that may be several additional production steps after the trial. Further, relevant sales may include several R&D trials which require taxpayers to undertake a form of product cost tracking that is far in excess of current IFRS accounting standards or tax law requirements.
In addition, the design of the legislation contains a serious flaw in that the proposed provisions can be used to make multiple deductions for the one cost as you are obligated to include feedstock input costs for each trial even if you have already included these costs in prior trials duplicating the deduction and yet you can only adjust this once for the final sale of finished product.
You Can Easily Glaze Over In This Particular Furnace But A Solution Is At Hand
Hopefully, you haven’t glazed over like a Krispy Kreme and you are still with us.
If we can get the Bills into the consultation process, this program-crippling cause of concern can be readily fixed. The proposed changes should be dropped and replaced with a set of better-drafted provisions that more clearly spell out the operation of the current legislation. And, in late-breaking news, MJA has drafted a set of revised provisions which we believe will see everyone on the same page. You are more than welcome to a copy of them and need only reply to this email with ‘Please Send Provisions’ in the Subject line and they will be heading to your inbox.
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.
It’s Not Easy Being Green
Not one person has said that all they want for Christmas is more MJA Updates on the R&D Tax Credit (the Credit). Yet we feel compelled to send you some as many critical issues still need to be resolved in order for the initiative to move forward successfully.
The best we can offer is to break up our discourse in to 3 bite-size chunks over the next 2 weeks so that we don’t add too much Christmas cheer to your inbox all at once. And then we will leave you alone to rest up over your New Year break.
First up, some reflections on the emergent role of the Greens. We will follow with a reinforcement of the key forgotten issue of feedstock and a rumination about what the new Ausindustry assessment procedures might be saying about the future operation of the Credit.
It’s Not Easy Being Green
Or so Kermit the Frog would have us believe. Well, it’s a proposition that is getting well tested early in the life of the minority Labor Government by the twists and turns in the ongoing Credit saga. As the dust settles from the latest failure of the Bills to reach the Senate before the close of Parliament for the year, the role of the Greens has emerged as pivotal.
This was always expected to be the case from 1 July 2011 as the Greens assume the balance of power in the Senate. If the independent Senators, Fielding and Xenophon, cannot be relied upon to support the Bills between February 8 (the first sitting day for the Senate next year) and June 30, then a fresh opportunity to get them through will commence on 1 July if the Government can get the Greens on board.
Let’s consider what we know about the Greens position so far.
More Argy Bargy About What Qualifies As Eligible R&D
So much of the debate to date has been about the restrictive impact of the introduction of the dominant purpose test on R&D claims. Of particular concern to the Greens might be the limitations imposed by the new regime on the development of climate change process technologies. Well, if they are, they certainly are keeping their cards close to their chest as nothing is being said publicly.
The first real indication of their position was the 150 words or so spoken by Lower House Greens MP Adam Bandt in his recent Second Reading Speech on November 22 in the debate that saw the Bills pass the Lower House. In stating that the Greens are strong advocates for government support for R&D, particularly where it reaches SMEs, he indicated that his party would support the Bills in the Lower House but would be seeking to move some amendments having engaged in “some significant consultations”.
Though the Bills didn’t reach the Senate, we did get to see the Greens amendments. Again, the focus was almost entirely on what should constitute eligible R&D activities. In summary, the Greens proposed to amend the Bills as follows:
- Limit the dominant purpose test to companies with a group turnover of greater that $20 million. (This was proposed by the Senate Economics Legislation Committee’s majority report in May 2010.)
- Restrict, by note, deductions for eligible supporting activities to those only in the year the core activity occurs thereby eliminating supporting costs that occur in the period before or after the core activities. (This a first-time proposal that would further curtail support available under the R&D Tax Credit.)
- Some “clean up” items that tidy up the Bills.
A cynic might suggest that the proposed amendments may have equally come from Treasury or the Government that would be seeking to exact some compensation (the new limits on deductions for supporting activities) for a rollback of the dominant purpose test in respect of SMEs.
So not very encouraging for critics of the Bills but at least a precedent has been set that the Greens are purporting to adopt an independent voice.
Let’s Make It Less Easy By Turning Up The Heat
Calls continue for the Bills to be put into an independent consultation process as soon as possible so that a workable new Credit could be in place and open for business by 1 July 2011. Again, we remain attracted to the idea put forward by Heather Ridout, Chief Executive, Australian Industry Group, that such a process be headed up by the Board Of Taxation. If the Government decides that its best bet is to wait until the new Senate kicks in on the same 1 July, then the heat needs to be put on all stakeholders now, and on the Greens in particular, to come the table early in the New Year.
We will be turning up the heat with respect to this proposition by continuing to push for the establishment of the consultation process as a priority. As Kermit would tell you, just because you might have the balance of power, you can’t expect life to be all fly-catching and lily pads.
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.
R&D Tax Credit – The Waiting Game Continues
The R&D Tax Credit Bills have failed to reach the Senate before the close of Parliament for 2010. The earliest that the Bills can now be voted on is February 2011.
MJA sees this as an ideal opportunity for the Government to put the Bills into an independent consultation process to address the continuing criticisms of the proposed legislation. We remain attracted to the proposal put forward by Heather Ridout, Chief Executive, Australian Industry Group, that such a review should be conducted by the Board of Taxation.
We will provide an analysis of the most recent chapter in this ongoing saga in an MJA Update next week.
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.
The New R&D Tax Compliance Framework
Over the last few months, AusIndustry has begun the roll-out of a new R&D Tax Compliance Framework. This framework is being applied to existing R&D Tax Concession claims and will be adopted by AusIndustry if a new R&D Tax Credit comes into operation.
AusIndustry recently conducted the first in a series of state based consultative forums to discuss operational issues related to the new compliance framework. This forum was held in Sydney on November 18 with a similar forum planned for Melbourne on Monday November 29.
The new compliance framework involves both State and National Office delivery with the process tailored to the nature and value of the R&D.
Small and Medium R&D Claimants
Small and medium R&D claims will be primarily managed by AusIndustry’s State and Territory Offices through a series of compliance activities that will escalate in intensity if issues remain unresolved and may ultimately lead to a statutory assessment. This process is collectively known as the Compliance Continuum and involves the following four stages:
- Registration Profile Review – review of registration documentation involving no contact with the registrant company.
- Registration Desk Assessment – the company receives a letter requesting specific information on a project’s R&D activities and their eligibility.
- Compliance Activity Review – will involve a site visit to the claimant company to discuss potential eligibility issues.
- Statutory Assessment – undertaken by the State and Territory Offices. Their decisions are legally binding but the claimant has the right to appeal. This will escalated to the National Office.
During each stage of the Compliance Continuum a company is judged to be either a ‘low’ or ‘high’ risk of meeting compliance. A ‘high’ risk rating will lead to the next stage of the compliance continuum.
Large R&D Claimants
Companies with large projects and high R&D expenditure will need to work with AusIndustry under an Active Case Management Strategy being managed by the National Office in Canberra. This process will involve a review of registrations by sector with the intent to seek independent expert advice on registered activities and on R&D in the sector generally. The key aspects of this framework will include:
- Larger matters to be progressed in close cooperation with the Australia Tax Office
- An independent expert opinion sought for each sector
- Projects or activities considered to have a high likelihood of ineligibility will be subject to statutory assessment to be undertaken by the National Office
AusIndustry has not provided any detail on the quantum of R&D expenditure which will determine whether a claimant gets assessed under the Compliance Continuum or Active Case Management framework.
Taxpayers should continue to approach their R&D claims with the same business as usual attitude. MJA looks forward to providing feedback and discussion on the compliance culture with AusIndustry and the ATO to ensure that it is effective and does not create an overly cumbersome compliance burden for companies.
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.
R&D Tax Credit – Is It “Groundhog Day” All Over Again?
If you have been following the debate surrounding the re-introduction of the R&D Tax Credit (the Credit) legislation to Parliament, you’d be forgiven for feeling a little bit like Bill Murray’s character in the movie, “Groundhog Day”. You’d swear that you had already heard all this before.
And it can all get a little bit annoying for everyone having to restate their positions one more time. Just like Bill having to have the same conversation with his old buddy, Ned Ryerson, who accosts him in the street at the same place at the same time each day in the film. (You remember “Needlenose” Ned. He did the whistling belly-button trick at the high school talent show.) You might even want to follow Bill’s lead and punch the Credit right on the needlenose.
Of course, we would never advocate such an approach even if we sneakingly admired your passion. However, we do encourage you to take a deep breath, review the situation and then stay involved in the development of this critical piece of legislation for Australia’s future. With your support, we believe that the Government can hit all its policy marks without any of the radical changes contained in the legislation being necessary.
Spot the Differences
The first thing to note is there are some differences from the Bills that failed to get to the Senate in June.
The law is now attempting to be applied retrospectively from 1 July 2010. There have been two minor amendments to the Object Clause and the definition of Core R&D Activities. And there is the small matter of a minority government where passage through the Lower House is no longer a given.
Yet the Bills remain unchanged beyond that so, at the risk of going over old ground (hogs), we would like to restate the key issues as we see them. And, if like me, you have been knocking on the doors of the Independents without much result so far, it would be good to get a refresher as the Bills head towards a vote just in case you get a few minutes with one or more of the cross-benchers in your travels.
At the minute, we see everyone zeroing in on amendments to make the Bills more palatable and this is a usual political reality. It’s worth taking a step back to look at the big picture to challenge whether the sweeping changes are justified at all and whether there is another way to preserve the institutional understanding and achievements surrounding the R&D Tax Concession (the Concession).
First Cab off The Rank
The attempt to make the Bills retrospective should be dropped. Tax professionals assure us that retrospective application would be a poor move in terms of good tax practice. Further, companies need a transition into a new R&D tax regime. If it was announced immediately that the commencement date was 1 July 2011, this would allow the establishment of an independent consultation process to seek improvements in the proposed laws, followed by the pre-release of administrative guidelines so that all parties could hit the ground running in the new tax year. We support the Australian Industry Group’s call for the Board Of Taxation to head up an independent, timely consultation.
We’re Closer than You Think
Consultation, enactment and transition could easily occur in the next 8 months as there is widespread agreement on many of the main features of the Credit. There is no apparent opposition to the move from a concession to a credit format, the closure of the 175% Premium provisions and the introduction of foreign-owned IP. The disagreements all stem from the proposed changes to definitions of activities and expenditure that resulted from the Treasury consultations last year.
What’s The Headline Problem Again?
The fundamental rewrite of the definition of R&D activities and associated expenditure provisions has been justified by the Government on the basis that the program needs to remain revenue neutral going forward for the next 4 years and that only “genuine” R&D be eligible.
There are two concerns that this raises.
Firstly, the need to make these changes at all has not been supported by the release of any economic modelling by the Treasury. MJA has submitted that we believe that the cost imposts of higher base rates and foreign-owned IP will be more than offset by the closure of the incremental provisions. Given the Government has conceded that the new rules restrict the claims of existing taxpayers by 20% (with many commentators estimating a figure closer to 50-70%), it is difficult to conceive of where the required flood of new claimants will come from to leave the program costing the same. In the absence of modelling, the case for change has not been proven.
Secondly, assuming the case could be established, the Government has refused to be engaged on any alternative solutions that could deliver a revenue neutral outcome that would avoid the need to change the rules for ALL claimants, be they new or existing.
Many large corporates and their industry associations have indicated that they would be prepared to negotiate a group claim cap if they can be shown that further cost control is necessary. If the cost gap could be proved, then historical claim data would enable a reviewable group claim cap to be set to limit the amount of benefit these groups could derive each year. This would achieve the revenue neutral outcome without the need to change the current rules for the SMEs that are the Government’s priority with the Credit. And it would avoid the clear inference in the Explanatory Memorandum that large resource and manufacturing concerns do R&D that is somehow not as “genuine” as their SME brethren.
In essence, the big end of town is saying that we will accept a cap along with a lower base rate and no access to refundability if we can be shown the need for the cap based on the numbers. This would allow everyone to move on from the negative views that have been expressed about “whole of project” claims and supposed misuses of the Concession.
It seems like a sweet deal and I think the Government needs to be challenged on why it won’t discuss this offer.
Getting To the Final Reel
Politics being politics, we appreciate that the Bills may end up being the subject of passage by amendments and MJA will continue to do all it can to assist in tackling the issues of dominant purpose, feedstock expenditure and administrative power.
Today, however, we want to have a final crack at getting everyone back to the table to review whether all the myriad changes and complexities of the Bills might be avoided by a pretty straightforward negotiation and agreement.
A truly independent, focused consultation might just lead us to all want to give Ned a big hug rather than a punch on his needlenose.
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.
- 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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