R&D Tax Concession – Is It Under Threat?
The Tax and R&D Tax Concession Working Group, part of the current National Innovation Review (NIR), has indicated that it intends to build on the work of the March 2007 Productivity Commission (PC) Research Report, Public Support For Science And Innovation, in its assessment of the R&D Tax Concession. Full details about the Working Group are provided at the end of this Update
At a recent Hargraves Institute session hosted by MJA, Dr Laurie Hammond, one of the five Working Group members, indicated that the Group’s intention was to not reinvent the wheel and to give due consideration to the PC’s conclusions and recommendations
We find this somewhat alarming. And if you do to, it is imperative that you register your concern by making a submission to the NIR at their website before the closing date of April 30 2008. A planned series of workshop meetings and “roundtables” will take place after the closing date. If you don’t make a submission this month, you may miss out on an opportunity to particpate in these discussions in May/June prior to the delivery of the Cutler Report, the NIR’s Green Paper, in July.
Why alarming? Well, here’s a quick reminder of what some of the PC’s key recommendations were in its 2007 Report:
- Restrict access to the 125% R&D Tax Concession to small firms only. By small firms, this was taken to mean those that turn over less than $5 million annually. The recommendation was to remove access from all other companies.
- Change the 175% Incremental R&D Tax Concession to an R&D to sales ratio, rather than the current rolling base.
- Relax the beneficial ownership requirement by allowing foreign subsidiaries that hold intellectual property abroad to have access to the incremental concession only.
This last recommendation led the previous government to rush through the 175% International Premium R&D Tax Concession. Space does not permit a dissertation on the myriad ways in which this has been the worst piece of legislation associated with the R&D Tax Concession. Suffice to say, at the March briefing sessions about how to make an ‘international’ claim, the Departmental officials admitted that it had been concluded that the new program was not likely to influence the R&D behaviour of the supposed target group of multinationals in any way.
Our clients are telling us that, beyond the small company scenario, there are too many uncertainties associated with the 175% Incremental program to incorporate this incentive into R&D plans. The only concession that can be put into project plans and approval budgets with relative certainty is the basic 125% rate. One can only imagine that this would be exacerbated by moving to a R&D to sales ratio basis of calculation. For example, if a company’s sales growth outperforms its increase in R&D spend, the incentive effect might be reduced and may even be removed. Who would make R&D expenditure plans on that basis?
strong>It is crucial that the NIR hears your views on this matter. Are you happy that the R&D Tax Working Group is using the PC report as its starting point? We are certainly very concerned about this approach and will be saying so in our submission.
National Innovation Review – The Tax and R&D Tax Working Group
The Working Group is dedicated to the review of the R&D Tax Concession scheme including the R&D Tax Offset.
It will consider the R&D Tax Concession within the broader context of the impact of the overall tax system on innovative activity. It will also consider the role of the concession in the context of the overall innovation system, having regard to other program options.
The first meeting was held on 18 March 2008 and broad discussions were held regarding the following:
- the objectives of the R&D Tax Concession
- what about the program is currently working and what is not currently working in terms of factors such as eligibility of activities
- innovation in the services industry and the role that the concession could play in this
- data and information needs of the Working Group
The Group’s work will be incorporated in the overall Cutler Report due in July. In response, the Federal Government will deliver a White Paper in October/November.
The members of the Working Group are:
- Dr Terry Cutler (Chair), Principal, Cutler & Co.
- Dr Nicholas Gruen, CEO, Lateral Economics
- Dr Laurie Hammond, Director, iQ Capital Management
- Dr Peter Burn, Associate Director, Australian Industry Group
- Mr Graeme Davis, Department of the Treasury
Dr Hammond indicated that the following list of questions is a good indication as to where the Working Group will be directing its thoughts. These questions form a good basis for framing a NIR submission on this matter. They are as follows:
1. What other tax treatments/instruments are an incentive or disincentive to undertaking R&D and broader innovative activities?
2. How can we adjust these tax treatments/instruments to better support R&D and innovation?
3. Should the R&D Tax Concession be used to encourage collaborations between industry and universities/researchers?
4. How can we use the tax system to encourage increased skills development and training?
5. What non-R&D tax incentives would support your firm’s broader innovative activities?
6. What can we learn from other countries’ approaches?
7. How can international linkages and more R&D by multinational companies in Australia be encouraged? What will most induce this overseas investment?
8. Are there R&D activities that you undertake that are currently ineligible under the R&D Tax Concession?
9. Are there eligible R&D activities of the R&D Tax Concession which you feel are inappropriate or open to misuse?
10. If the R&D Tax Concession was removed tomorrow, what impact would it have on your R&D expenditure now and into the future?
11. What R&D Tax Concession rate do you think is needed to stimulate significant new R&D expenditure?
12. Is it the corporate tax rate or the rate of the tax concession that makes the difference to your R&D activities?
13. Pros/Cons of tax concession versus grant program in targeted areas?
14. What difference would it make if the R&D Tax Concession were changed from a deduction to a credit? (i.e. a percentage of R&D expenditure is deducted from tax payable)
