The R&D Tax Incentive – Like the Footy Finalists, Take It One Week at A Time

4:29 pm by Kris Gale · 2 Comments

A few weeks ago, we were chatting with the tax manager of a large engineering firm about the proliferation of briefing sessions currently being offered regarding the new R&D Tax Credit, to be known from today as the R&D Tax Incentive (the Incentive). We agreed that the whole thing seemed a little early as the Bills hadn’t yet passed and the views of the Government were yet to be heard.

From our perspective, we had attended two Government workshops about the Incentive in August and nothing substantive could be said by the authorities about matters of interpretation as the law was not yet in place. The tax manager went on to say that if the company’s technical staff heard that you may not have a claim if your predominant purpose was commercial, not R&D, a number of them would grab hold of this red card being offered and send themselves off so they didn’t have to help claim an R&D project ever again. We concluded that it would be best to learn a little more about the Incentive rulebook before we launched a whole new strategy for winning in the R&D game.

As we write this MJA Update, the Incentive is waiting patiently for Royal Assent. The word on the street is that this will be achieved around the middle of next week.

The understandable reaction from companies after such a long wait would be to get cracking and attend any briefing session on offer; start assessing what R&D now qualifies and begin installing new identification and costing systems. How else do you win the Grand Final?

Well, as any coach will tell you, you don’t get ahead of yourself, you play each game on its merits, you take the season one week at a time, and a litany of other sporting clichés in devising a successful approach.

And so we believe it should be with your response to the Incentive. Right now, we think that the best thing you can do is keep on doing what you’ve been doing with regards to the R&D Tax Concession. Keep identifying and tracking the same projects and the same costs.

And here’s why.

To Know the Rules, You Must Know the Umpire

You would be aware that the Incentive is to be jointly administered by AusIndustry, the Innovation Australia Board and the ATO. They are the refs and umpires and we all know that we need to work cooperatively with these bodies to achieve an effective transition to the Incentive regime. Right now, it is their views of the operation of the new legislation that we need to reference and understand before we can meaningfully respond as to how the Incentive affects taxpayers. The fact of the matter is that they have yet to publish their interpretations of the rules, let alone blow their whistles. Until they do, MJA believes it is way too premature to be attempting to determine a finalised approach to successfully claiming the Incentive.

As such, we advocate that you retain your current approach to identifying and documenting R&D that is currently eligible under the R&D Tax Concession (the Concession). Ultimately, the narrower definitions of the Incentive will mean that some of your R&D activities and costs that you track may not be eligible, but this can be reconciled towards the end of the first year of the Incentive, by which time the views of the administrators will be much better understood. Remember that nothing substantive about the interpretations of the new rules has been tabled by Government since the second Explanatory Memorandum back in the first half of 2010. If you speak directly to AusIndustry and the ATO at the moment, they can only respond with the fact that they can’t comment as the Bills are not yet law. All the rest of us can do right now is speculate on the impact of matters such as dominant purpose and feedstock and how the Government will interpret these new concepts.

What Is the Schedule for the Rest of the Season?

Through MJA’s membership of the R&D Tax Incentive National Reference Group (NRG), we have come to understand that the planned Government roll out will go along these lines:

A national series of AusIndustry/ATO information briefing sessions which have just been announced for each of the capital cities from mid-September. Click on the link for the dates and to register your attendance. Initial guidance material will accompany these sessions.
A discussion paper entitled “R&D Tax Incentive Guidance Discussion Paper” will be released in late October 2011 and a period of active feedback and comment will follow.
Following the passage of the Regulations and Decision-making Principles, application forms for Advance and Overseas Findings will be released. This should occur before Christmas.
In the first half of 2012, detailed guidance material will be published including sectoral guidelines covering manufacturing, mining, information technology, biotechnology, agribusiness and construction.
The Registration application form is most likely to appear in the New Year.

As you can see, there will be several months to digest the Government’s viewpoints and requirements and the great unanswered questions will finally start to receive some useful answers.

Keeping Your Eyes on the Prize

At the appropriate time, MJA will run a series of free seminars to assist you in preparing to make your first claim. But we only intend to do that when we have something meaningful to discuss. In the interim, we will keep you posted courtesy of this Update. Remember, we want all of your team out there on the R&D paddock with everyone fully committed and enthused. Don’t get them looking for those red cards right now so they can risk taking you out of the game for the ultimate R&D prizes.

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.

Filed under: MJA Update Articles
Tagged: ATO, AusIndustry, Dominant Purpose Test, Feedstock Offset, R&D Tax Concession, R&D Tax Credit, R&D Tax Incentive

R&D Tax Credit finally passed through the Senate

4:14 pm by Kris Gale · Comments Off

At 1 pm today, 23 August 2011 the Bills to replace the R&D tax concession with the R&D tax credit finally passed through the Senate. The only successful amendments were those to provide for a quarterly rather than an annual refundable R&D tax credit for SMEs from 1 January 2014, and to amend the start date of the new incentive to 1 July 2011. These amendments will have to be considered by the House of Representatives before receiving Royal Assent.

We do not expect there to be any impediment to the amendments being accepted. Outstanding issues such as the unworkability of the Feedstock provisions remain but MJA will continue to work for a workable solution or amendment.

More information on the details of the new R&D incentive will follow shortly.

Filed under: MJA Update Articles
Tagged: AusIndustry, Feedstock Offset, R&D Tax Credit, The new research and development tax incentive

Alas, poor R&D project, we knew you well

4:04 pm by Kris Gale · Comments Off

As we write this current MJA Update, the R&D Tax Credit (the Credit) legislation is (very) patiently awaiting debate in the Senate. We understand that the Bills may go up next Monday (22 August) but, whenever they do, it is expected that they will pass without great difficulty owing to the hard-won support of the Greens. The MJA Update will alert you regarding these events as they occur.

The passage of the Bills had been a long and tortuous one. Most of the heat and light coming from the critics (of which MJA has been one) has been directed at the dramatically revised definition of eligible R&D activities and the changed feedstock provisions. However, an additional concern that is now emerging more clearly is the vast increase in administrative powers connected with the Bills and this was reflected in the recently-tabled Credit Regulations and Decision-making Principles.

MJA has recently had two major interactions with AusIndustry and the Australian Tax Office that have provided an initial insight into the proposed regime for accessing the Credit. We attended a roundtable in Canberra on 12 August as an inaugural member of the R&D Tax Incentive National Reference Group (NRG) and also participated in a Canberra workshop for advisory firms during the previous week.

What we learned was that the first public statements from the program administrators will be made at a series of Australia-wide briefing sessions in September. Detailed guidance material and application forms will be released progressively in the months that follow.

But we were also left with a genuine concern that the program will be one that companies will need to administer on an R&D activities basis, rather than by continuing to utilise the well-understood concept of an R&D project.

You Don’t Know What You’ve Got ‘Til It’s Gone

Since 1985, the R&D Tax Concession has operated with an activities-based definition. However, companies have been able to register, claim and cost their R&D activities on a project basis. This makes perfect sense. Technical people think in terms of projects. Accountants do not cost at an activity level. And the Government has always had the right to “drill down” further to an activity level in an assessment environment. Companies have understood that they need to be able to respond accordingly in respect of selected R&D projects. This is where advisers have played a key role and all parties have acknowledged that it entails a significant amount of additional work.

However, the early indications with respect to the Credit is that taxpayers will need to operate all aspects of their claims on an activities basis from registering through to costing prior to being selected for any audit activity. Currently, the Concession has one type of eligible activity – R&D activities – with the two limbs of ‘systematic, investigative and experimental’ and ‘directly related’. By way of contrast, the Credit has five distinct categories of eligible activities – core R&D activities and four types of supporting activities, all with new concepts attached to them.

At the recent consultations with Government, a draft Advance/Overseas Findings application form was discussed. The form required separate descriptions of all five categories, an indication of which supporting activities supported which core activities and cost estimates for each individual activity.

Now imagine a full registration and project costings schedule on the same basis! Take a very simple example.

Under the Concession, you register an eligible R&D project and describe all the R&D activities under the project heading.

Say 8 people work on that project. You capture their eligible time and submit a claim with the cost of the 8 people identified.

Moving to the Credit, if the project has 10 activities, an activities-based approach will require you to separately describe all 10 activities including identification of the linkages. Then you will need to split the costs of the 8 people across all 10 activities resulting in potentially 80 pieces of cost information.

Same project, same claim, same benefit, exponentially more work. Yet the Credit was meant to be simpler for taxpayers and encourage more SMEs into the program. How’s that again?

There is no doubt that the new law will necessitate that this additional information be provided in an assessment environment and all stakeholders need to work together to make sure that this can be effectively done when required. However such a task should be confined to that part of the self-assessment system involved with audits. Accessing the program at the registration and tax schedule stages must remain on an R&D project basis. We cannot drown a program that is already trending as narrower and more complex in a deluge of paperwork. Government concerns about the level of detail of the information provided and the prevention of fraud must be counter-balanced by administrative convenience and a true sense that this is an incentive program. One should never design a system to better target the minority that misuse it at the expense of the responsible majority and the overall program objectives.

We urge the Government to establish that the law and regulations simply enable them to request activities-based information at appropriate times such as in audit environments rather than compel them to require it at all stages of a claim. Following that, all stakeholders should be engaged to assist in the delivery of a workable approach to help boost Australia’s innovation stocks. Let’s keep the concept of the good ol’ R&D project front and centre. The Australian innovation community cannot afford to see it confined to the pages of history.

Filed under: MJA Update Articles
Tagged: AusIndustry, Government Consultation, R&D Activities, R&D Project, R&D Tax Concession, R&D Tax Credit, R&D Tax Incentive, Registration

R&D Tax Credit Opens For Business

4:14 pm by Kris Gale · Comments Off

Great News For SMEs Down The Road

The Federal Government has confirmed that the revised start date of the R&D Tax Credit will be 1 July 2011 in a joint release from the Treasurer and the Minister for Innovation, Industry, Science and Research.

In a sweetener for SMEs, loss-making claimants will be eligible for quarterly payments of their Credit entitlements from 1 January 2014. Something to look forward to!

The text of the press release appears below.

CROSSBENCH SUPPORT MEANS NEW R&D TAX CREDIT WILL START ON 1 JULY 2011

Australian companies will become more innovative and globally competitive thanks to the new R&D tax incentive.

The Gillard Labor Government’s $1.8 billion R&D Tax Credit will deliver more funding to innovative firms – including manufacturers, ICT and biotech – increasing productivity and Australia’s national income.

This builds on Labor’s policy reform agenda of the past four years and will be a major benefit for businesses that innovate and use R&D as a platform for future growth.

Today we welcome crossbench Senators announcing their support which means the parliamentary road-block put in place by the Coalition will finally be removed.

The new and improved Credit will target more funds to genuine R&D deserving of public support – good news for industry and better value for taxpayers.

It will deliver a 45 per cent refundable tax credit to companies with an aggregated turnover of less than $20 million and a 40 per cent non-refundable offset to all others.

This will allow more firms to benefit from our massive boost to the innovation, science and research budget, helping them grasp the opportunities of our transition to a cleaner economy.

We welcome the commitment of industry, the Greens and independent parliamentarians who have put good policy ahead of political posturing in supporting this reform.

The development is the culmination of an extensive consultation and negotiation process.

Following discussions with the Greens, the Government will introduce quarterly payments for small and medium businesses from 1 January 2014. These firms will get their credit sooner, significantly improving their cash flow and incentive to invest in R&D.

The deferral of the start date to 1 July 2011 has an overall impact of $40m, with a negative impact of $310m in 2011-12 and a positive impact in 2012-13 of $270m.

The Government will continue to work in partnership with the business community to get the most from this landmark reform. An advisory group will be established through the Innovation Australia Board to monitor the implementation and operation of the Credit. The Government, through AusIndustry, will run an extensive education program to ensure firms are kept up to date.

MJA will keep you informed of all major developments as the Credit legislation becomes law.

Filed under: MJA Update Articles
Tagged: AusIndustry, Government Consultation, R&D Tax Concession, R&D Tax Credit, Senator Kim Carr, Treasury

All I Want For Christmas Is A R&D Tax Credit That Works?

3:06 pm by Kris Gale · Comments Off

There is no better way to get a reality check on your viewpoint than when you are presented with a clearly opposing position. Such is the case with this week’s announcement that the Australian Information Industries Association (AIIA) has written to Minister Carr to support passage of the draft R&D Tax Credit (the Credit) legislation. While the AIIA concedes that the Bills are not perfect, it is attracted to a more rapid cash-back for SMEs and the fact that the legislation recognises that R&D in the Information, Communications and Telecommunications (ICT) sector is not a laboratory exercise comprising experiments and test tubes. The AIIA goes on to predict that the Bills will be re-introduced into Parliament in the Autumn sittings with a view to a July 2011 commencement.

In responding to these statements, we would note that the Credit definitely increases the number of candidate company groups able to access the cash-back aspect of the program but there is no indication that the ATO will be sending out its cheques more rapidly. Further, we are unclear as to how the AIIA has reached its conclusion that the new package recognises that ICT R&D is not a laboratory exercise, inferring that the current R&D Tax Concession (the Concession) takes that position. Previous MJA Updates have demonstrated our concern that the proposed changes to the definition of R&D activities run the risk of all corporate R&D being subject to a narrower lab-like regime, irrespective of the industry sector involved.

For starters, the new definition of core R&D activities requires them to be experimental as an isolated requirement. And supporting R&D activities will be subject to the new complexities of the dominant purpose test. Let’s take a closer look at this issue.

Dominant Purpose – Don’t Worry. Be Happy

When the Bills recently passed through the Lower House, the Assistant Treasurer, Bill Shorten, said “The dominant purpose test is a well-defined concept commonly used in tax law.” In short (no pun intended), there was no cause for concern about how the test would work in practice. This was in response to the Opposition amendment on dominant purpose. Yet the Opposition amendment, in common with the Greens amendment, the majority and minority opinions of the Senate Economics Committee and the vast majority of over 380 submissions referenced by the Assistant Treasurer all agree that the dominant purpose test in the Bill is a new, onerous and subjective test that will increase compliance costs and uncertainty and reduce encouragement for businesses to do genuine R&D. Further, Peter Thomas, Chair of Innovation Australia, confirmed in his evidence to the Senate Economics Legislation Committee that determination of which of any of the driving purposes of an activity is the dominant purpose is all a matter of judgement.

Given the extent of the concerns expressed, how does Mr Shorten reach his conclusion?

The dominant purpose test is present in a number of anti-avoidance provisions in tax law. Primarily, it is in Part IVA, the General Anti-Avoidance Rules (GAAR). In this regime, “the dominant purpose” is determined by a set of eight expressly defined and legislated rules that are used to determine which of all the possible dominant purposes in an arrangement is the dominant one. All the other anti-avoidance provisions either have rules to determine the dominant purpose or apply even if tax avoidance is not the dominant purpose.

Since its introduction in 1981, the Part IVA GAAR have been, to say the least, contentious, especially in the application of the dominant purpose tests. It has been a major focus of tax law court activity with notable cases like Hart’s case, Spotless and Macquarie Finance. It has been a major focus of ATO activity with rulings and taxpayer alerts aplenty. Interestingly, Bill Shorten announced a review of the GAAR on 18 November 2010 to focus on rewriting these rules to “improve the integrity, certainty and simplicity of the income tax laws”.

Hardly a ringing endorsement of a “well-defined concept”.

Unlike the GAAR and other tax law dominant purpose tests, the Bills contain nothing to determine how the dominant purpose is to be determined in relation to supporting R&D activities. It is not linked to any of the eight tests in the GAAR, so any of the court cases around these tests will have limited value as precedents. We will be starting with an essentially clean sheet if the Bills enact the proposed definition.

In the light of the above, MJA suggests that you should be worried about dominant purpose but you should always stay happy!

The New Assessment Regime – Don’t Worry. Be Happy

Well, actually, even the AIIA is worried about this one. They have commented on the increased audit and compliance activities associated with Concession claims directed towards the ICT sector, especially SMEs.

Again, we would suggest that this is a program-wide development. The Government’s recent consultative meetings about the new regime revealed that the program commenced back in July with, in fact, no consultation and no announcement. The new step of requiring written responses to questions on projects has massively increased the compliance burden on taxpayers selected for review.

Already, we are observing a number of problems with the approach. There is a lack of standardisation in the types of questions being asked, resulting in misleading questions and a number of inaccurate statements of the law. The responses are generally required within thirty days but AusIndustry will not commit to a timeframe within which they will process the received responses, thereby adding to uncertainty.

A key concern is that there is no guidance as to how much information should be provided in the responses. At the consultative sessions, AusIndustry indicated that many taxpayers are providing too much information. Given the lack of guidance and the fact that the types of questions are those normally attributable to s39L full audits, this is hardly surprising.

Of great concern is that taxpayers are being processed to the next step – a site visit – with no reasons being provided as to why the written responses provided did not satisfy AusIndustry’s requirements.

It seems that a new assessments industry might have sprung up to justify the large increase of resources announced in the 2009 Budget to deal with a Credit that failed to commence in July 2010.

MJA will follow up these concerns up with the Government with a view to getting parties around the table to assess the early performance of the new regime resulting in the introduction of equitable reforms in the process.

It’s The Festive Season – Don’t Worry. Be Happy

This brings to an end our trilogy of somewhat gloomy MJA Updates in the wake of the failure of the Bills to be enacted in 2010.

However, this failure creates opportunity anew to address the problems. It was a year ago when the first draft of the Credit arrived as an early Christmas present and we have all gone some way towards improving the Credit before it becomes law. The basic program remains a great idea. We still need to fix up the details for it to be a successful one.

Our agenda for 2011 is clear but right now is the time for us all to relax and catch our breath. We wish you and your family all the very best for Christmas and 2011. We look forward to alleviating all our worries about the Credit in the New Year so it can be a truly happy one for Australian innovation.

Filed under: MJA Update Articles
Tagged: AIIA, Assessment, ATO, Audit, AusIndustry, Dominant Purpose Test, Government Consultation, Innovation Australia, Part IVA GAAR, R&D Tax Concession, R&D Tax Credit