R&D Tax Credit: A Chance To Be Heard

9 July 2009 by Kris Gale

The Federal Government held two “pre-consultation” sessions in Melbourne (19 June) and Sydney (26 June) to help prepare a discussion paper regarding the new R&D Tax Credit legislation announced in the May Federal Budget. Following the release of the discussion paper in mid-July, a formal consultation process will commence.

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.

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.

Filed under: MJA Update Articles
Tagged: Cutler Review, Feedstock Offset, Government Consultation, Innovation, National Innovation System Review, Policy, R&D Tax Credit, Venturous Australia, Whole of Mine

Comments

Comments are closed.