Submissions regarding the Treasury consultation paper, “The new research and development tax incentive”, close on Monday, October 26. 

The public consultation sessions were completed in Sydney yesterday. It seems apparent that an Exposure Draft of the legislation is already advanced and is likely to be released next month. This makes submissions vital if you are concerned by the direction taken in the Treasury paper. The time to raise your issues is NOW.

 To assist you, MJA is delighted to give you access to our draft submission.

If you would like to see it, reply to this update using our contact form and we will email a copy to you immediately. 

Our submission is consistent with the viewpoint expressed in the MJA Updates initially circulated in the wake of the consultation paper. In concluding that the proposals contained in the paper will not result in a less complex and more predictable R&D tax program, our submission makes the following points:

• By proposing to change the definition of R&D activities, the Federal Government is seeking to restrict the breadth of R&D support at the very time that corporate Australia is being asked to lift its R&D effort in areas of vital national significance such as the Carbon Pollution Reduction Scheme and the National Broadband Network
• The Treasury’s case for reform is not made out either in terms of R&D policy or Budget revenue neutrality
• Changing the definition of R&D activities and asking taxpayers to split claims into core and supporting activities will add the single greatest layer of complexity, uncertainty and compliance burden in the history of the program
• Changing the definition disproportionately impacts on SMEs
• The changes will have an immediate negative impact on BERD

In short, the Treasury proposals will result in a much more complicated program and run the risk of severely curtailing R&D support in Australia at a most inopportune time.

 We look forward to continuing to share views on this vital matter.

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The past week has been a predictably intense one. The Treasury consultation paper, “The new research and development tax incentive”, has attracted widespread comment, concern and criticism. Some have seen the paper as the harbinger of the end of effective government support for R&D. Others believe that the consultation process is illusory and that the decisions have already been made. MJA has a more tempered view. And it’s a view based on direct dealings with government over the past week.

Kris Gale, Managing Director of MJA, has met with the Treasury and Innovation, Industry, Science and Research officials nominated as the contact points for the consultation process. He is booked in to meet with Senator Carr’s office on Monday, 28 September. He has presented on the topic to three conferences in the last 7 days. Contact has been made with several industry advisory bodies and all members of MJA have been canvassing client companies and other interested third parties for their reactions and views. The month of October will see this program of active engagement continue apace.

Has any good news emerged?

The answer is yes.

The Government officials will reassure stakeholders at the announced public consultation sessions (see details below) that the paper is truly a discussion paper and that the exposure draft of the legislation will take submissions and commentary into direct account.

They have acknowledged that the delay in issuing the paper has placed pressure on the timetable for the delivery of the new legislation and allowances will need to be made. They indicated that the main source of the delay was the fact that the paper spent considerable time in the offices of Senator Carr, Mr Swan and Mr Rudd and that this is a reflection of real ministerial engagement.

Assurances were also given that the ‘additionality and spillovers test’ referred to in Paragraph 48 of the paper will not translate into a legislative requirement and that this will be confirmed at the consultation sessions. Further metrics around the issues raised such as the meaning of a revenue neutral program over the next 4 years will also be provided.

Finally, it is now clear that the Refundable Tax Credit will be available to foreign-owned R&D in contrast to its announced preclusion in the May Budget.

So what is the Big Issue in the paper?

Without doubt, the main concern raised by the paper was the announcement of the fact that the definition of R&D will be changed in order to reduce the expenditure available to be claimed against the Credit. This was deemed necessary to achieve budget outcomes and justified on a policy basis of focusing support on the areas of highest net benefit and redirecting support to the SME sector.

In announcing the changes, the paper curiously made use of the “old school” terminology of core (cf. SIE) and supporting (cf. directly related) activities. It was indicated that core activities will need to contain innovation AND technical risk, rather than just one of these elements. Further, limitations are to be brought in with respect to supporting activities and the paper sought responses to a suggested list of possible restrictions.

In the next fortnight, MJA will circulate its draft response to the paper which will analyse our concerns with this ‘Big Issue’ in detail. However, we would like to take this opportunity to sound the alarm now.

The Government announced on Budget night that the R&D Tax Credit will replace the “complex and outdated” R&D Tax Concession with a

“…simplified R&D Tax Credit which cuts red tape and provides a better incentive for business to invest in research and innovation.”

The Issues Paper makes the case for the Credit delivering a simpler program by highlighting the following:

 “Paragraph 9.….Companies will no longer need to distinguish between their base and incremental expenditure on R&D in working out their claim.”

Yet, under the proposed changes, companies will have to distinguish between their core and supporting activities in working out their claim with the direct result of a restricted level of support for supporting activities.

So much for a simpler R&D tax program. Changing the definition of R&D will, by the few strokes of a pen, introduce an unprecedented level of complexity, attendant uncertainty and compliance burden into the program.

The case for definitional change is simply not made out in the paper. No concrete evidence is given. The very thin examples in Attachment A are misleading in their conclusions. No modelling is being offered up to amplify the cost concerns. Given these factors, MJA believes that the Big Issue needs to be thoroughly explored with relevant stakeholders as soon as possible.

If cost control is the political outcome required, MJA believes that the real focus needs to be on reviewing expenditure provisions. Changing the well understood, internationally competitive definition of business R&D will cruel the prospects of all companies involved, whatever industry they are in and whatever their size. In fact, it will be the technology-intensive SMEs who will be hit the most as they are the companies that spend large proportions of their operating budgets on R&D compared with the mature sectors who have the largest claims in numerical dollars but modest claims in terms of proportions of  overall operating cost.

It is well known that Australia currently sits on the lower end of OECD Business Expenditure on Research and Development (BERD) comparisons. Changing the definition of claimable R&D along the lines proposed means that we should be expecting snakes not ladders in our BERD future.

MJA will continue its campaign of direct liaison with the Government to explore the issues raised and work towards a negotiated result that promotes a sensible outcome for business innovation policy.

But what can I do?

Make time to attend the upcoming public consultations. Details are below and bookings can be made through the following link Bookings

Make a submission. It doesn’t have to be a treatise. It does need to express the concerns that you have and it should set out how the proposed changes would affect you, both good and bad. The aim is to be  constructively critical, not destructively so.

In both these matters, don’t rely on your advisers and industry bodies to make all the running this time. You are the Credit’s proposed customers. Your voices are the most influential ones.

And keep talking. Dialogue generates ideas that can then be translated to workable solutions. Please include us in your conversations. We are passionate about effective innovation policy and we would love to hear what you are thinking.

To keep the dabate moving, contact Kris Gale directly on (02) 9810 7211 or using our contact form.

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.