Last week’s announcement that changes were being made to the draft legislation and explanatory materials associated with the New R&D Tax Credit (the Credit) was very welcome.

MJA has expressed its concern that the Bill’s attempt to legislate additionality and spillover in the Object Clause (something the Government publically assured stakeholders would not happen) creates a fundamentally flawed platform from which all the identified problems flow. These problems include the expenditure not at risk provision, the augmented feedstock rule, the severely restricted definition of R&D, the software changes and the radically changed compliance framework. Further details about these concerns are contained in our submission to the Treasury.

However, what gets lost somewhat in the debate about the impact of the changes is a clear understanding of why the changes need to be made in the first place.

This MJA Update wants to review some aspects of the debate with a view to contributing to a rational discussion when the revised legislation and associated materials appear. A future Update will tackle the numbers issue around the need to maintain revenue neutrality in the program.

It’s Blockbuster Time

Students of popular culture know that the onset of the Northern hemisphere summer heralds a new wave of “tentpole” or blockbuster movies. These days, you can count on a comic book movie or two to be among them. This is, of course, a good and bad thing. For every “Iron Man” to enthral us, we can be sure to be burdened with an “X-Men Origins: Wolverine” (Sorry, Hugh). Looking ahead, “The Mighty Thor” is in the pipeline and you can bet that there will be a role for his half-brother and arch nemesis, Loki, the God of Mischief. And if we are to believe the Federal Government, Loki has been wreaking his handiwork amongst the R&D Tax Concession (the Concession).

Throughout the recent consultations, government representatives repeatedly highlighted that the restrictive changes to the program were necessary because of various mischiefs.

Well, what are some of the mischiefs associated with the Concession and are they really, in fact, myths that shouldn’t be put forward as justification for the sweeping changes that have been attempted?

Mischief 1 – The current Concession facilitates bogus, illegitimate claims against the taxpayer

All incentive schemes may be subject to misuse and the Concession is no different. That is why the legislation includes a number of checks and balances including penalty regimes. Audit programs are in place to ensure that taxpayers do the right thing. In fact, all the evidence over the history of the program is that it is responsibly used by the vast majority of users and very few risk assessments proceed to prosecutions. Removing benefits from all taxpayers for the inappropriate behaviour of the few is not a rational response to the issue of alleged misuse.

Mischief 2 – The Concession provides assistance to non-genuine R&D

This was a can of worms that was opened up by the Cutler Report on the National Innovation System which raised concerns about “whole of mine” claims which were characterised as large, one-off claims made by mining and civil engineering companies involving significant operating costs.

The inference that has emerged in the consultative process is that these claims do not involve genuine R&D and should be stopped or severely limited in the new Credit. These sentiments fit in with a world view that certain types of R&D (e.g. biotech, medical performed by SMEs) merit support and others have a weaker case (e.g. large company resources and engineering projects).

This is not what Cutler said. Cutler stated that the so-called “whole of mine” projects were R&D but that they were expensive and that the government might look at putting some reasonable limits on the amount of support that goes to these legitimate R&D activities.

The real mischief here is when one starts to import a moral dimension to what is genuine R&D. The strength of the current Concession is that it delivers an internationally-competitive definition of eligible industrial R&D. The proposed definition in the Credit, in seeking to narrow the definition to limit assistance to “genuine R&D”, manages to disqualify the vast majority of R&D actually conducted by Australian businesses, large or small.

Mischief 3 – The criticism of the Credit has come from those with a vested interest in the status quo

The initial observation to be made here is that responses such as the recent public submissions to the Treasury will always come in the main from those with a vested interest. That is the usual driver for a party to respond at all.

If a submission comes in arguing for the status quo, does it automatically follow that the submission can be discounted because it is designed to protect a vested interest?

Speaking for MJA, our February submission to the Treasury essentially argued for the status quo. Further, we believe that the proposed Credit was not going to be good for our business. But that did not form the basis of our submission. We have always approached our submissions from a primary standpoint of what will deliver good program outcomes.

As recently as the Cutler review, we campaigned vigorously for the closure of the 175% Premium on the grounds that it was a high cost element of the Concession that did little to influence R&D behaviour. Yet every month we billed clients to prepare premium claims. We were happy to see this business go if the result was a simpler, more effective R&D tax incentive. We were pushing for a major change to the status quo.

Our views have been echoed by many other advisers, industry groups and taxpayers and the closure of the 175% Premium has raised nary a voice in protest.

So why is it that our critiques can now be dismissed as being hostile and reflecting vested interests? Is the real mischief here the fact they don’t concur with the views of the Government?

Mischief 4 – 80% of the Concession goes to 100 companies

For decades, Australian Bureau of Statistics on R&D have indicated that the vast majority of innovation spend is incurred by a handful of Australian companies. This is, and will always be, a matter of fact. The current trends in the Concession simply reflect this fact. Given that the Concession is open-ended, the share of those 100 companies will be determined by the prevailing rules and the amount they identify and claim. When added to the spend and claim of the other 7,900 firms in the program, the proportions will then be determined as a matter of mathematics.

There is not a finite amount of claims and assistance available. The proportions are only determined after the claims are identified and made against the rules.

The thinking behind the restrictions in the new Credit is that the rules can be changed to alter these proportions. This is entirely possible. You can rewrite the rules so that the proportion of assistance accessed by the other 7,900 is a much larger figure. The problem comes in when the rules are so restrictive that the proportion is larger but the overall value of the assistance to those 7,900 companies falls.

This is exactly the concern being reflected by the commentators regarding the Credit. We are being offered a program that wipes out assistance across-the-board. A larger slice of the cake might go to SMEs but so what if we are now cutting up a cup cake as opposed to a passionfruit sponge.

So, has Loki got something to answer for?

A recent editorial in the Australian Financial Review called for the draft Bill to be withdrawn or thrown out on the basis that the Government’s arguments for the major restrictions could not be made out. MJA agrees wholeheartedly. The mischiefs aren’t real. They are really more akin to myths (perhaps like the Treasury modelling that shows the changes to be revenue neutral?!) and Loki is off the hook on this one.

So don’t expect Thor to be wielding his mighty Uru hammer against the Credit in a multiplex anywhere near you soon. Not enough legs in that plot.

Looks like it’s up to us mere mortals to keep up the fight as we await the revised legislation.

If the suspense is too much in the interim and you would like to discuss the issues, feel free to contact  Kris Gale directly on (02) 9810 7211 or using our contact form.

 The letter below sets out the scope of the review including five major concerns that have been reflected in the recent submission process: 

• Definition of Core R&D Activities
• Definition of Supporting R&D Activities and the extension of the Excluded Activities list
• R&D activities involving software
• Registration of core and supporting activities
• Augmented Feedstock rule

 To that list, MJA will be highlighting concerns regarding the Object clause, the “expenditure not at risk” provision and the changed compliance regime.

 The Treasury is seeking examples of “genuine R&D” that are believed not to be entitled to support under the proposed regime and any other suggestions that parties may have. These can be submitted directly via rdtaxcredit@treasury.gov.au or MJA would be happy to facilitate any responses that you might have.

 We are greatly encouraged by this news and strongly urge you to have your voice heard.

 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.

MJA - Treasury R&D Letter

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.

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. 

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.

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.

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

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.

The New Research and Development Tax Incentive

The first thing to note is that the paper, entitled “The new research and development tax incentive”, has been issued by the Treasury. This is a big surprise as Treasury officials did not attend the consultation sessions on the R&D tax concession held last year as part of the National Innovation Review. Furthermore, the two pre-consultation sessions held in June this year were headed up by a representative of the Department of Innovation, Industry, Science and Research rather than a Treasury official.

The impression that Treasury has taken control of the process is reinforced by the fact that responses to the paper, due by Monday, October 26, are to be submitted to the Business Tax Division of the Treasury. This is all a great worry. Is it now the case that the destiny of the Federal Government’s flagship innovation program is no longer in the hands of the government department actually responsible for innovation? This matter will need to be pursued with vigour. The process is subject to a tight timeframe as draft legislation is mooted by the end of the year.

The paper itself is an odd amalgam of decisions apparently already made and areas for discussion where there is no guidance as to what the thoughts of the authorities actually are. It includes a series of unsubstantiated assertions about the operation of the current R&D tax concession and betrays an extremely poor understanding of how business R&D (BERD) occurs. It is easy to get carried away by the disappointing quality of the paper’s analysis and it will predictably attract a firestorm of criticism from the business community with regards to the number of restrictions to eligible activities and expenditures that the Treasury appears to be advocating.

However, now is not the time to panic.

Firstly, there a number of positives to reflect on:

• Increased rates of benefits
• Removal of the complexities associated with the premium
• Extension of the rebate concept
• More generous provisions relating to overseas R&D
• Allowing foreign ownership of generated IP
• Improvements to R&D software rules

Achieving Workable Outcomes

Secondly, the huge concerns raised by the discussion regarding ‘Eligible R&D activity’ in the report need to be vented but then channelled into achieving workable outcomes. The Government needs to be reminded of the main policy game here – improving Australia’s overall R&D effort. There is a need to learn from the lessons from 1996 where the Coalition’s introduction of significant reductions to the R&D Tax Concession led to a collapse of Australia’s BERD over the next 5 years. We are already behind our competitors. Unnecessary restrictions will run the risk of Australia dropping off the back of the pack.

Businesses and Stakeholder Organisations to Have Their Say

Finally, the consultation process must be approached as a real opportunity to turn around the poor performance of the administration in program delivery in recent years. The new Credit, however defined, will fail if it is delivered by the same administrative mindset currently associated with the R&D Tax Concession. The experiences of taxpayers need to be submitted directly to the authorities so that this message is clearly heard.

MJA will be working with its clients, industry bodies and other interested parties to ensure that all the relevant issues are raised in the consultation process. We would be delighted to assist you in this regard in whatever manner you deem appropriate.

To discuss the matters raised in this MJA Update in greater detail, please contact Kris Gale 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.

Most Significant Outcome of the Sessions

The consultation is being headed by a team organised by the Department of Innovation, Industry, Science and Research (DIIRS). MJA has been given an explicit invitation to supply the names and contact details of all interested parties who would like to be involved in the planned face-to-face meetings that will form part of the consultation process. We have direct access to the team leader, Tony Weber, who has agreed to respond personally to all such requests. Please contact Kris Gale using our contact form if you would like to be included in the list of organisations that would like to participate.

The following is a summary of the main aspects of the sessions.

Legislation Timetable

July 2009                                 Release of consultation paper

Winter/Spring 2009                   Release of draft legislation

February 2010                          Bill released into Parliament

1 July 2010                              Program commences

Attendees

The meetings were chaired by Tony Weber of DIISR. Peter Thomas, the Chair of the Tax Concession Committee of the Innovation Australia Board, was also in attendance along with officials from AusIndustry, the Australian Tax Office and Treasury.

Over the two sessions, three companies, five industry associations and six advisory firms were involved. This is a small representation and it is to be hoped that a broader cross-section of views is canvassed following the release of the discussion paper.

Summary of Discussion

The Credit will be placed in the 1997 Tax Act.

The government has directed that the program be drafted so that it is simpler and more predictable than the current R&D tax concession. The government also directed that, to keep the new program revenue neutral at a cost of $1.4 billion per year for the medium term, the eligibility criteria need to be “tightened” in order to support only “genuine” R&D.

It was agreed that ‘revenue neutral’ really means ‘kept at the same cost’.

Four approaches are being considered:

• Rewriting/fine tuning the definition of R&D activities
• Extending the concept of expenditure offsets
• Introduction of special sectoral rules
• Introduction of various forms of claim caps.

A key theme of the discussions concerned whether this exercise should be carried out from first principles (i.e. a “clean sheet of paper”) or a reshaping of the existing tenets of the R&D tax concession. A strong consensus emerged from non-government attendees that the latter is preferable. The strongest theme from the floor was that the major strength of the current program was the relative stability of the definition of R&D and that this should not be unnecessarily altered.

The main conclusions that emerged appear to be as follows:

Sectoral rules and claim caps are unlikely to fly.

Definitional change is hard to achieve in terms of the key concepts. Explicitly excluding certain activities was seen as a preferable way to go.

Considerable discussion focused on the SIE/directly related meanings and differences. The attendees fed back to government that the easiest place to rule out “non-genuine” R&D activities is in the list of excluded activities. The hope was expressed that the discussion paper will provide such a list for specific comment and response. The concern was expressed that the negative statements contained in the Cutler Report regarding mining and heavy engineering in terms of “whole of mine ” claims and receipt of “disproportionate assistance” has greatly unsettled the current program. The paper needs to detail what are the real concerns, beyond the numerical dollars involved, that the government harbours about this R&D. If it is truly non-genuine, reasons need to be given.

The extension of the current feedstock expenditure offset definitely appeals to the policy makers.

There is a battle to be fought here. It appears that this is seen as the best way to restrict R&D claims conducted in the production environment by large organisations. The group pointed out that the current offset (introduced in 1996 for political reasons) applies to expenditure on eligible R&D activities, genuine R&D if you will, under the Act. Further incursions may lead to a program that incentivises only R&D that is not seen as likely to commercialise as companies will not ultimately access the incentive in production trials except in the (hopefully) rare instances of technical failure.

A wide range of other issues was canvassed in the two meetings. These included unlimited amendment powers, guaranteed returns provisions, on own behalf provisions, R&D planning requirements and program delivery (including an AusIndustry charter).

Conclusion

The more specific the involvement of companies and industry bodies in the post-July consultation, the better.

There is an accumulation of assumptions, assertions and unsubstantiated opinions that the government administrative bodies are bringing to this process that, if not carefully refuted, could easily result in an R&D tax credit that is available on such a restrictive basis that it will fail to impact the R&D planning processes of corporate Australia, particularly in the large company sector. It needs to be remembered that the Top 100 company groups conduct 75% of Australian business R&D expenditure. These corporates will receive a lower rate of support (10 cents) than SMEs (15 cents) under the proposed credit, they are to be excluded from the refundable component and they are to lose the premium component. If the industrial nature and the commercial focus of the support is lost through definitional change or wide-ranging offsets, the damage to Australian corporate R&D culture could be immense.

We look forward to working with you in shaping a truly effective R&D tax credit through the consultation process.

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