Why Uncertainty is the Enemy of R&D Tax Concessions
Imagine getting notice of a tax audit going back to 1996
Who even worked your for organisation then?
Where would the records be?
How would you substantiate the R&D claims you made?
How much better, or worse, would your situation be if the audit went back to 1986?
Although the Commissioner of Taxation has recently given up many unlimited amendment rights, the R&D provisions are not among them, meaning that all claims since 1986 have an element of uncertainty around them.
But this type of uncertainty had a logical starting point
From 1986 until 1996 taxpayers had the ability to retrospectively amend returns to claim the R&D tax concession. The provisions were a new area for tax law and taxpayers, the ATO, and the Industry Research & Development Board (now Innovation Australia) needed time to establish how the program would work.
In 1996 the then new Coalition Government announced that the ability to make retrospective claims would be removed by requiring companies to register their R&D activities annually, within six (now ten) months of the end of the company’s tax year.
But the Commissioner never gave up his power to amend retrospectively, which is a source of uncertainty in the program.
Why does uncertainty matter so much?
Each year you’re required to plan your R&D.
And you work hard to get access to the funding you’re entitled to under Australian tax law.
And the project economics you put to the decision makers will be affected by the R&D treatment you can expect.
And all of this is planning is about the future.
(And the only certain thing about the future is that it’s uncertain).
So along with all of the risks in your project (like the future costs of production, the impact on the customer, and the advances in competitor technologies) you need to factor in the uncertainty of changes to the program. Historically, the majority of changes to the program have not been in your favour.
The hard reality is that taxpayers have to make assessments about the eligibility of their R&D activities as they occur; because of their inherent nature at the time they are conducted. They do not become eligible with hindsight.
How audit compounds uncertainty and reduces R&D activity
Audits and assessments always involve hindsight. They are undertaken with the advantage of perfect knowledge about what has happened since a project commenced, and by people who stand outside the company and its industry.
Unfortunately, audit and assessment activities do not run to a workable commercial timeframe. Even allowing for the inevitable commercial and government pressures that can operate to reduce the speed of an audit, the fact that assessments of R&D eligibility that date back to 1998 are still current introduces significant uncertainty into the program.
In fact, much of the delay in assessment matters we see stems from AusIndustry staff changes and difficulties in obtaining independent expert opinions. Should Innovation Australia ultimately make an adverse finding in a particular case, the taxpayer goes to the next step knowing that the potential interest bill (assuming no penalties apply) should it ultimately be denied the deduction will be continuing to mount up.
This means for the taxpayers affected by the audit or assessment, the uncertainty in their claims is compounded. And when that potentially includes competitors and other industry players with similar projects, or project eligibility issue the scale of the uncertainty becomes clearer.
They face uncertainty about whether to register similar R&D activities in future years. They face uncertainty about whether to take up claims for expenditure, knowing that their ability to retrospectively amend is limited, where the Commissioner’s is not.
All of this uncertainty operates to restrict claims, either by affecting the activities claimed or, worse, stopping R&D activities planned and projects with economics that may be sensitive to the R&D tax concession from being approved.
Net result: Less R&D activity.
What can be done to improve the situation?
Today’s reality is that Innovation Australia continues to initiate risk review and audit activities through AusIndustry to its own timeline. No time limits apply to AusIndustry in conducting risk assessments under the Compliance Monitoring Framework, or in commencing formal assessment activities.
Similarly, there is no time limit on the Commissioner (other than the Taxpayer’s Charter) commencing audit activity either independent from, or subsequent to, the Innovation Australia work. Clearly there is an opportunity to increase the certainty for taxpayers and enhance the timeliness of the regulators.
Change needs to happen on two fronts
Accepting that companies need to make commercial decisions about both the R&D they undertake and the R&D activities and expenditures they claim, greater certainty means better chances of the program having impact in corporate decisions.
Ideally, the Commissioner’s power to amend retrospectively (other than in instances of fraud or evasion as are currently preserved) should be brought into line with the general tax amendment provisions.
Further, due to the time involved in AusIndustry assessments and audit activities and the uncertainty they can create for taxpayers and broader industry, a binding time limit on the commencement of risk assessments and audits should apply.
These two initiatives, taken together, would effectively address the uncertainty in the program created by the slow progress of assessments and the Commissioner’s unlimited power to amend assessments.
Summary
1. Companies must make real-time decisions about what R&D activities and expenditure to claim.
2. The late initiation and slow progress of AusIndustry assessments taken together with the Commissioner’s unlimited amendment powers create uncertainty in the program.
3. Positive changes to address these uncertainties will benefit taxpayers and increase the commercial suitability of the tax concession.
Making these changes means that taxpayers will no longer have to worry about the prospect of an audit notice dating back to 1996. Or 1986 for that matter.
© 2007 Michael Johnson & Associates Pty Limited. All rights reserved.
