R&D Tax Credit – We’re Not in Kansas Anymore
With memories of the Christmas/New Year break rapidly becoming the stuff of legend, the R&D community is now able to focus on the Draft Bill and Explanatory Materials (released immediately prior to Christmas) that set out the design and operation of the new R&D Tax Credit.
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 R&D Tax Incentive – Like the Footy Finalists, Take It One Week at A Time
- R&D Tax Credit finally passed through the Senate
- Alas, poor R&D project, we knew you well
- Are We There Yet? Are We There Yet? Are We There Yet?
- MJA on Switzer
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