Senate Report on R&D Tax Credit Released

3:29 pm by Kris Gale · Comments Off

Report Contains a Series of Minor Recommendations Only but the Government Does Advocate Removal of Dominant Purpose Test for SMEs

The Senate Economics Legislation Committee (the Committee) released its Report into the R&D Tax Credit Bills (the Bills) yesterday. The Report sets up the debate in the Senate as to whether the Bills should become law prior to the proposed commencement date of 1 July 2010.

Overall, MJA is disappointed by the recommendations made by the Government in the Report and submits that the Dissenting Report of the Coalition Senators should be taken into account by the Senators on the cross-benches when the legislation comes to the vote.

When looked at in detail, the Government has recommended a series of minor changes to the Bill but has not undertaken any detailed analysis of most of the key concerns raised by so many of the stakeholders during the consultative process.

This is best illustrated by the Committee’s response to concerns raised regarding the proposed feedstock provisions which appeared for the first time when the Bills were read into Parliament on 13 May. At pages 61-63 of the Report, the proposed changes are outlined, followed by only one generally expressed concern made at the recent Senate hearings. The Committee goes on to note the concerns about the provisions without providing any details and then indicates that it “…does not believe this will be a problem for large companies.” It proceeds to recommend an advisory group be established to advise the administration on any “unforeseen consequences that emerge as the bill is implemented.”

Rather than dwell on whether this is a case of buck-passing of the highest order, we submit that it is a compelling example of the fact that the Committee simply didn’t have the time to absorb and analyse the feedstock issues in the same way that stakeholders were not afforded any time to undertake a similar process. Yet the new provisions stand to have a huge impact on eligible R&D for all claimants going forward. The same can be said for so many of the other concerns that have been raised regarding the Bills.

The content of the Report, spread very thinly over its 110 pages, underlines the rushed nature of the drafting process and the fact that the implications of the Bills in their current form have not been subject to anywhere near the requisite degree of scrutiny required for the making of good law.

Before setting out the recommendations and providing some further preliminary assessment of the Report, it is worth making particular note of the fact that the Government has recommended that the dominant purpose test be removed for companies with a turnover of less than $20 million. This would establish two distinct programs with separate definitions of R&D as well as levels of benefit. This takes the legislation even further away from the Government’s own announced policy, let alone the original position taken by the Cutler Report of a system that supported the same type of R&D within all organisations, large or small. It goes without saying that more compliance complexity and administrative uncertainty will follow.

We urge the Government to reconsider the passage of the Bills in the form recommended by the Committee. Policy on the run suits nobody and stakeholders have simply run out of time to consider the impact of the latest round of recommendations and amendments before the Bills need to be passed by 25 June.

The Government’s Recommendations

The Government Senators have made the following recommendations:

Recommendation 1
The Committee recommends that subsection 355-5(2) of the objects clause be
amended to clarify the reference to ‘new knowledge or information in either a
general or applied form’ by adding ‘new knowledge in an applied form includes
new or improved materials, products, devices, processes or services’.

Recommendation 2
The Committee notes that many of the concerns were raised by organisations
who want to maintain the status quo. Nevertheless, given the concerns raised, but
acknowledging the need to ensure that public support is targeted appropriately,
the Committee recommends that the definition of ‘core R&D activities’ in section
355-25 be amended to remove the word ‘about’ from paragraph 355-25(1)(b) so
that the paragraph reads as:
[talking about experimental activities] that are conducted for the
purpose of generating new knowledge (including about the creation of
new or improved materials, products, devices, processes or services).

Recommendation 3
Given the scope of the changes proposed, the Committee is of the view that the
amended provisions, including the effect of the ‘dominant purpose’ test, be
reviewed after two years to ensure that the legislation is operating consistently
with the Government’s intent.

Recommendation 4
The Committee recommends that companies with revenues under $20 million be
exempt from the dominant purpose test.

Recommendation 5
The Committee recommends that a broad–based working group including small
business and union representatives be established to advise Innovation Australia
and the Department of Innovation, Industry, Science and Research about any
unforeseen circumstances that emerge as the bill is implemented. This working
group would also inform the two year review of the bill (Recommendation 7).

Recommendation 6
The Committee notes the claim of drafting errors. The Committee notes that
minor drafting errors are common when framing new legislation. The
Committee does not believe that these minor errors are of sufficient magnitude to
delay passage of the bill but considers it preferable that they be dealt with before
the bill is enacted.

Recommendation 7
The Committee recommends that the Senate pass the bill, with the amendments
proposed in the earlier recommendations, before the end of June 2010. The
operation of the bill should be monitored on an ongoing basis and reviewed after
two years.

The Dissenting Report of the Coalition Senators

The Coalition Senators have made the following recommendations:

Recommendation 1:
The Coalition recommends that the start date for these Bills be amended to 1
July 2011.

Recommendation 2:
The Coalition recommends that the passage of the Bills be delayed in order to
rectify the issue of drafting errors.

Recommendation 3:
The Coalition recommends that the definitions of core and supporting R&D be
reconsidered to be more closely aligned to the Frascati model of R&D.

Recommendation 4:
The Coalition recommends that the dominant purpose test be removed and be
reconsidered.

Recommendation 5:
The Coalition recommends that the Object clause be amended to ensure that
both research and development are given equal tax benefits.

Our Preliminary Assessment

The spectre of the 2007 Productivity Commission Report (the PC Report) looms large over the Committee’s Report. In the opening to Chapter 6, the Committee states that:

“The bill will introduce aspects of the recommendations that came out of the Productivity Commission’s 2007 review;” (page 59).

This is a stunning admission given that the PC Report was so directly contradicted by the Cutler Report and it is Cutler that the Government has repeatedly quoted as the basis of its R&D tax policy. Again, remember that the PC Report advocated the closure of the basic concession for all but the smallest companies, leaving most with an incremental option only. Cutler advocated the polar opposite – enhance the basic incentive and close the incremental option and that is exactly what the Government announced in last year’s Budget.

The Committee is in the thrall of the additionality and spillover arguments of the PC Report and repeats much of the debate that had already been resolved in the Cutler Report. From MJA’s perspective, it is clear that the Committee could not follow the arguments we put forward regarding additionality involving the need to focus support on generating additional R&D activities from the R&D projects that companies do undertake rather than designing a subsidy aimed at getting otherwise marginal projects across the line.

The Government’s recommended amendments do very little to allay the concerns expressed by so many stakeholders since the consultation process began towards the middle of last year.

The changes to the Object Clause and the definition of core R&D activities appear designed to more explicitly acknowledge the eligibility of applied R&D but do nothing to address the restrictive impacts of the dominant purpose test and the new feedstock provisions. The express inclusion of new or improved products, processes, devices, materials and services in the definition of new knowledge actually doesn’t make grammatical sense. How is it that new knowledge includes the creation of new and improved products and processes as the Committee suggests?Traditionally, new knowledge has been seen as the output of basic and applied research whilst the creation of products and processes results from experimental development ie. the application of existing knowledge. The recommendation to equate the two is very confusing.

In discussing the extent of the restrictions associated with the definitional changes, the Committee indicates that these changes are really only seeking to limit ‘business as usual’ activities and ‘whole of project’ concerns. This is giving voice to some of Treasury’s recent defences of the changes but will offer no comfort to those faced with assessments of their production-based R&D claims in the new regime.

The discussion of the concerns regarding the dominant purpose test is perfunctory and, tellingly, avoids grappling with the conclusion expressed at the Senate hearings by the current Chair of Innovation Australia’s Tax Concession Committee that determining dominant purpose under the new legislation will be entirely a matter of judgement as opposed to a question of fact. At no time is any consideration given to the power of the current ‘directly related’ definition to regulate excessive claims but the impact of the change to dominant purpose is tacitly acknowledged by the Committee’s recommendation regarding the test and SMEs.

The removal of the dominant purpose test for SMEs is, in one sense, welcome but it does establish two distinct programs by legislating two different definitions of R&D. This feels like an innovation that we could all do without as it adds yet more complexity and uncertainty, particularly for taxpayers whose turnover is in the vicinity of $20 million. What such a change does do, is reinforce the notion that the dominant purpose test is a restrictive one that will see larger companies unable to receive support for an uncertain range of R&D activities that would have otherwise qualified had the organisation simply been smaller.

Many of the major concerns raised in the recent round of consultations – beyond feedstock, these included the splitting of core and supporting R&D activities; the quality of the Explanatory Memorandum, particularly its example projects used to demonstrate the operation of the new definition of R&D; the ‘expenditure not at risk’ provisions; the greatly enhanced administrative powers; the increased complexity of the compliance regime – did not result in any specific recommendations by the Government. Like all the other parties, the fact that the timeframe for considering all the issues has been so condensed has meant that it is apparent that the Committee did not have the opportunity to actively turn its mind to many of the concerns raised.

We are very concerned that the Government accepts the Treasury’s modelling without having seen it. As we pointed out in our last Update, it appeared from the Senate hearings that Treasury’s admitted reduction of claims by 15-20% did not take into account the closure of the 175% Premium Concession which we had demonstrated previously would save 30-35% of the current cost of the program. In the absence of any published modelling, the Committee steps into the breach and offers up its own “back-of-the-envelope” calculations in support of Treasury’s estimate (page 75).

In some breathtaking assumptions, the Committee suggests that the new regime will increase current program costs by one third to one half of current levels by the combination of higher rates and new program entrants and the savings associated with the combination of the changed definition and the closure of the Premium Concession will roughly offset these costs. We wish to strenuously challenge these assumptions, particularly as they are partially based on a submission we made regarding the impact on program participation back in 1996 where the number of registrants was no more than half the current number and when participation rates fell from around 4,000 to below 3,000. It is unreasonable to assume that program uptake by new entrants will be of a similar dimension given the user base now involves roughly 8,000 Australian companies.

Of course, there is no opportunity to do this prior to the vote and the Committee appears happy with its published back-of the-envelope numbers standing in the place of any need to publish Treasury’s elusive modelling. This is not acceptable.

Finally, we remain absolutely dumbfounded by the following statement on Page 1 of the report:

”It is neither sustainable nor in the national interest that 60 per cent of the total government support is consumed by 100 firms out of Australia’s two million enterprises”.

You will be growing tired of us pointing out that this figure is consistent with ABS statistics on the profile of Australia’s corporate innovation activity and is in line with international practice. We have continued to emphasise throughout the consultative process that large corporates are prepared to negotiate some limits on their R&D tax benefits provided they continue to be acknowledged as performing legitimate R&D on the same basis as their smaller cousins.

However, once more, we feel compelled to point out in the strongest manner possible that the R&D tax incentive is not a finite pie, 60 per cent of which is consumed by 100 firms. Rather, it is a self-assessment program in which 60 per cent of claims are currently made by the top 100 firms. Smaller firms are not crowded out by the claims of the top 100 firms. All firms claim their entitlements against the prevailing rules. No firm’s access to the available benefit is impacted in any way by the claiming behaviour of any other company. In 25 years of consulting on the R&D Tax Concession, MJA has never met a company that does not claim or has a reduced claim because of a claim being made by another company of any size.

If this is the justification for the gutting of the incentive as the Coalition describes it, then it should be shown for the fallacy that it is. The Cutler Report called for reform to R&D taxation support for all Australia’s corporate citizens in the National Innovation System. It never intended for this reform to be the ushering in of an era where large corporates are seen as doing a lesser class of R&D when serving Australia.

What Next?

The Bills need to get through the Senate by 25 June. The Coalition appears ready to vote against the legislation so the focus now shifts to the standpoints of the Greens and the Independents.

Keep an eye out for MJA Updates in the next few days regarding the impending vote as well as any additional issues that emerge from a closer consideration of the report.

As always, 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: additionality, ATO, AusIndustry, Government Consultation, Innovation Australia, National Innovation System Review, Productivity Commission, R&D Tax Concession, R&D Tax Credit, Senate Committee Report, spillovers, The new research and development tax incentive, Treasury

R&D Tax Credit – The Shock of The New

12:33 pm by Kris Gale · Comments Off

Hopefully, in amongst the Easter chocolate blitz and trips with the kids to see “Nanny McPhee And The Big Bang” (the only G-rated movie on these school holidays), you’ve had time to prepare a compelling submission in response to the 2^nd Exposure Draft and Explanatory Materials (the Easter package) detailing the New R&D Tax Incentive. If not, don’t worry. You have until Monday. OK, maybe you can worry just a bit.

Here at MJA, we have had to dispense with our usual practice of circulating our draft response to interested parties well in advance of the submission closing date as only 10 working days were provided to put thoughts together. As a second best alternative, we have decided to make use of the MJA Update to give you a snapshot of the main conclusions that will be contained in our submission.

In a Nutshell

We believe that the Easter package should be treated as though it was the first response to the May 2009 Budget announcement.

We have concluded that the package is legislating a brand new business R&D support program that is a fundamental departure from the established principles and framework of the existing R&D Tax Concession (the Concession) and that 25 years of institutional experience and memory related to the Concession is at real risk of being jettisoned.

We submit that the Easter package is introducing a different type of support for corporate R&D that dramatically narrows the range of eligible activities and expenditures. In doing so, the program has shifted from supporting corporate research and development to corporate research only. This shift is reinforced by the replacement of the current Objects clause with its five promotional objectives with a new Object clause containing one restrictive premise that only business R&D reflecting additionality and spillover merits support.

The eligibility requirements for core and supporting R&D activities have been changed, not clarified, and have added several layers of complexity and uncertainty for program participants. In addition, new legal concepts have been introduced such as ‘production’ and ‘business as usual’ R&D for the first time in the Easter package. The previewed compliance framework shifts the Credit away from the principles of self-assessment to a program controlled by administrators through a range of sectoral guidelines and position statements so that it takes on a form resembling a discretionary grants program delivering support based on the perceived merits, rather than the eligibility, of the R&D.

Further, there are a number of unresolved features of the draft legislation such as expenditure not at risk, overseas expenditure requirements and core technology transition provisions. Critically, the redrafted feedstock expenditure provisions announced in the Easter package have not been made available to stakeholders.

Finally, after a legislative development process that has long been characterised by delay and a lack of true consultation, the Easter package now provides a miniscule amount of response time followed by a rapid timetable by which it becomes operative law on 1 July. For the vast majority of claimants, there will be no transitional process in place for taxpayers to absorb the new legislation and establish new plans and procedures. Rather, there is a hard changeover from the old system to the supposedly brave new world.

Overall, we submit that there is an unacceptable risk that the Easter package will harm Australia’s innovation system by withdrawing critical support for commercially-focused R&D. And remember that it is this aspect of R&D that Australia traditionally lags behind our competitors. There is an urgent need to provide for a comprehensive review of this legislation including a realistic process for its implementation in an orderly fashion. This may well involve a need to delay the introduction of a number of features of the Credit to ensure a smooth transition for taxpayers.

How New is New?

Given the above, it is worth demonstrating as briefly as possible why we agree with the Government that it is a brand new program, rather than a reform of the old one, thereby leading us to conclude that the timetable to convert this draft package into legislation is simply too rushed and likely to involve unintended consequences and outcomes.

Since the consultation process began in earnest, all the Treasury releases have been headed “The new research and development tax incentive”. Recent consultations with Government officials have reinforced the idea that the R&D Tax Credit (the Credit) is being treated as a new program by outlining a different style of administration based upon industry sector-specific guidelines and a compliance framework that will be built from the ground up.

This Government’s emphasis of the fact that the program is a new one stands somewhat in contrast to the policy announcements in last year’s Budget which referred to a tightening of eligibility criteria of the current Concession to better support “genuine R&D”. There was a sense that there would be a significant carryover of the principles and understandings associated with the Concession and the Budget announcement reinforced this notion.

It is now clear that this is not the case. The fact that this is a very brave new world is even more starkly set out in the Easter package than with the 1^st Exposure Draft and Explanatory Materials (the Christmas package).

To demonstrate this, take the new definition of R&D activities contained in the Easter package as an example.

A New Definition of R&D

The Treasury’s consultation guide to the Easter package refers to a “clearer” definition of core R&D activities by its use of clear language in the place of ambiguous concepts such as ‘considerable novelty’ and ‘high levels of technical risk’. What they should go to say is that the intended definition of both core and supporting R&D is fundamentally different to the very stable definition that has been in place since 1985.

As you would be aware, eligible activities have been separated into two categories –core and supporting – with separate qualification tests. Previously, activities qualified as eligible R&D activities collectively through the ‘SIE’ or ‘directly related’ pathways. Now they are split into two distinct baskets.

As Treasury has indicated, the new definition of core R&D requires taxpayers to be seeking new information (to solve problems or develop new or improved products and processes) and to need an experiment to uncover that knowledge.

The concepts of systematic, investigative, innovation and technical risk have all been dispensed with. These are concepts that are useful to taxpayers in qualifying their R&D activities and are well understood as opposed to ambiguous. Ten of the current technical objectives – the creation of new or improved products, processes, devices, material and services – have been eliminated and subsumed into the new knowledge objective.

This is an unequivocal narrowing of the definition of core R&D compared to the current Concession and, in fact, to the one contained in the Christmas package. Add the four new classifications of supporting R&D activities and the new restrictive Object clause and you end up with a very different definition of eligible business R&D.

The September 2009 Treasury Consulation Paper stated that the Government was altering the definition to bring it more in line with the Frascati definition. They could no longer credibly maintain that this is the case. The proposed definition reflects the first two elements of Frascati – basic and applied research – but experimental development has been removed.

The new Explanatory Materials confirm the narrowing of the definition. In paragraph 2.16, they indicate that it is not enough to be doing experimental activities if they “merely confirm what is already known”. As displayed in the example projects provided, the suggestion is that the taxpayer will need to be able to prove in a retrospective assessment that the knowledge did not exist anywhere else. Not only is this highly impractical. It also flies in the face of encouraging an innovation system where several companies in an industry pursue the development of new and improved products and processes and the associated knowledge in parallel.

The guidance given to taxpayers as to how to interpret the definition is very open-ended. The Explanatory Materials indicate that qualifying the eligible purpose of the activities is a question of fact based on the overall circumstances of the conduct of the work (paragraph 2.32) without detailing what the key determining criteria might be. It appears as though the Government is seeking to preserve as much discretion as possible when assessing claims. This is apparent from the statement in paragraph 2.32 that says that “…it is possible that activities that are similar in appearance might qualify as supporting activities in one context but not in another.”

As we have been saying all along, the Credit is seeking to institute a scientific definition of R&D that gives voice to the Productivity Commission’s world view of what is “genuine R&D”. Yet that view was not the one put forward in the Cutler Report, the Government’s Innovation White Paper or the May 2009 Budget announcement which all reflected the existing industrial definition.

Suddenly, we are at ground zero and you’ve been given 10 working days to get your head around what it all means!

More Work For Us All To Do

The proposed Credit is new, uncertain and even a bit scary.

We urge you to use the April 19 response and the highly likely Senate Committee as your last remaining opportunities to elicit the Government to pause and take stock of whether the proposed Credit really aligns with its previously announced policy. Hopefully, we can all then move on in a spirit of true consultation to ensure the right R&D outcomes for Australia’s innovation future.

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: BERD, Cutler Review, Government Consultation, Innovation Australia, National Innovation System Review, Productivity Commission, R&D Tax Concession, R&D Tax Credit, The new research and development tax incentive, Treasury

The New R&D Tax Incentive – Second Exposure Draft Released

9:42 am by Kris Gale · Comments Off

“The Good, the Bad and the…oh, you know the rest.”

The Federal Government released the second Exposure Draft (ED) and Explanatory Materials (EM) in support of the new R&D Tax Credit (the Credit) after the close of business on Wednesday, March 31. In what is arguably emerging as a pattern, the ED and EM have been delivered one working day before the Easter break. This leaves a scant ten working days available before the due date for responses (April 19).

Given that the ED introduces some first time concepts such as a new definition of core R&D activities and ‘business as usual activities’, this is hardly enough time for a considered response. There is a wealth of new discussion material and examples to absorb and interpret yet most of us won’t really turn our minds to this until the middle of next week.

MJA will generate a comprehensive update regarding the changes and circulate this next week. We shall also share our detailed views about what are the next possible courses of action. The Government continues to insist that this Bill will become law prior to July 1 and it proposes to introduce the Bill in the Budget session of Parliament (May 11).

What’s New and What’s Our Gut Feel

Object Clause

The Object clause has removed the reference to spillover but clearly retains the concepts of additionality and spillover in its wording. All the promotional objectives from the current legislation remain removed. The new clause is restrictive in its terminology.

Splitting Core and Supporting R&D Activities

The need to distinguish between these two classes of activities has been retained and this remains a major concern with the Credit. It should be remembered that the need to split these activities is a first-time feature of the new program.

A “Clearer” Definition of Core R&D Activities

The new definition requires that you seek new information and that you need to do an experiment to uncover the knowledge. The concepts of ’systematic’, ‘investigative’, ‘considerable novelty’ and ‘high levels of technical risk’ have all been removed. The Government’s explanation is that this simplifies the eligibility requirements for core R&D. However, we are concerned that the changed definition may have far-reaching impacts on the operation of the Credit. And there is little time allowed to think through those implications and formulate a response.

A Narrower Dominant Purpose Test for Supporting R&D

The dominant purpose test will only be applied to production activities (apparently not defined) and activities on the exclusion list. The ‘directly related’ test will be retained for the balance of supporting activities. This is the single largest concern with the ED and EM. The supplied examples in the EM clearly spell out a desire to restrict the availability of the Credit across a range of necessary, dare we say, genuine R&D activities. The same concerns remain as those stated by so many parties in response to the Treasury September 2009 Consultation Paper. The dominant purpose test stands to remove most of the support from the vast majority of innovation projects conducted by modern Australian companies.

Lifting Exclusions on Supporting R&D

Given the dominant purpose test, it has been decided that the exclusions list no longer applies to supporting R&D activities. This is sensible and focuses our concern on the likely application of the dominant purpose test.

A New Approach to Software R&D

In a pleasing development, most software R&D will be subject to the same rules as all other kinds of other R&D. The multisales test and the broad-based exclusions have gone. Certain in-house software activities will be excluded from core R&D but will be subject to the dominant purpose test for R&D.

Changes Regarding ‘Expenditure Not At Risk’

The ‘expenditure not at risk’ rule has been clarified to align with the Australian Taxation Office’s interpretation of the corresponding existing rule. We support this announcement as being sensible.

Augmented Feedstock Rule

This rule has been dropped and we are happy to see it die a quiet and polite death. A redrafted provision of the existing feedstock provision will be retained. That space will need to be watched as the redrafted provisions are not yet available.

Enhanced Administration Powers

Most alarmingly, all the proposed enhanced powers for the administrative bodies in the first ED have been retained. In short, taxpayer claims prepared under self-assessment can be unilaterally reclassified and rejected by Innovation Australia based purely on the registration application. MJA finds this unacceptable and will vigorously oppose these changes.

So, is this a Win?

Many will be tempted to see the new ED and EM as something of a win for the post-Christmas lobbying effort and this is understandable. However, the harsh reality is that the main positives are around the removal of some of the more extreme elements that appeared for the first time in the Christmas announcements – augmented feedstock; radical changes to software; a naked ‘expenditure at risk’ provision. The current package leaves us back where we all were when the Treasury delivered its September 2009 paper – a restrictive Object clause legislating additionality and spillover (despite the original public assurances to the contrary); a first-time split between core and supporting R&D activities; a wide-reaching dominant purpose test. Remember, 162 of the 165 responses to the Treasury paper published last year opposed such changes. They were a bad idea then and they remain a bad idea now. Six months on and we have made little progress. It’s time to consider whether the best for all concerned is to have this Bill made subject to a Senate review as an urgent priority.

Filed under: MJA Update Articles
Tagged: Government Consultation, Innovation Australia, National Innovation System Review, R&D Tax Concession, R&D Tax Credit, R&D Tax Credit Issues Paper, The new research and development tax incentive, Treasury

30 April 2010 R&D Tax Registration Deadline

6:51 pm by Craig Stewart · Comments Off

30 April 2010 is the final date to apply for registration with Innovation Australia for R&D activities undertaken in the year ended 30 June 2009.

Each company has 10 months after the end of its financial year to apply for registration under the R&D tax concession (or offset) for the R&D activities it undertook in that year. Registration is a prerequisite to making a claim in the company’s annual tax return.

If you want further information, please review our R&D tax concession services or Contact MJA.

Filed under: Key Date Alert
Tagged: deadline, Innovation Australia, R&D Tax Concession, Registration

Why ‘whole of mine’ fails the interpretation test

9:45 am by Craig Stewart · 2 Comments

The floor of the United Nations General Assembly buzzes with the languages of its 192 member states.

Yet, as each representative rises to speak in their native tongue, they are confident that what they say will be faithfully interpreted to the balance of the assembly. They understand that a verbatim translation of what is said may make no sense in a foreign tongue, and so rely upon the interpreters to communicate the meaning as best they can. This transfer of meaning is the interpretation test.

But, no one is present to interpret English to English, or Spanish to Spanish.

Sometimes you need interpretation even in your native tongue

When the Cutler Review of the National Innovation System published its report Venturous Australia in September 2008, one shorthand phrase in the analysis of the R&D tax concession stood out, the reference to ‘whole of mine’ claims. This is what was recommended:

appropriate measures be taken to heavily constrain ‘whole of mine’ and similar claims against the existing R&D Tax Concession program or proposed Tax Credit program.

Unfortunately, from literally interpreting the phrase, many people think they know what ‘whole of mine’ claims are, but the term has no legislative, policy or administrative meaning. In fact, the government has said nothing about the phrase or policy issue at all.

Yet, we have already started to receive questions from AusIndustry on behalf of Innovation Australia as to whether or not particular projects or claims are ‘whole of mine’ claims.

In one case the applicant has been asked why a claimed project is not a ‘whole of mine’ claim, despite the claim being for a very small fraction of one year’s operating costs.

This is the problem of shorthand, and of administrative decision makers interpreting a policy signal from a review document.

We need to focus on context for interpretation

In our response to the Cutler Review Report we said:

The term, ‘whole of mine’, has recently emerged as a type of shorthand for describing large claims and needs to be removed from the lexicon of the discussion. It adds an emotive element that clouds discussion as to the role that can be played by a tax instrument in innovation policy. A mythology has been built up around these claims that needs to be moved on from in the current debate.

Large claims are definitely made within these industries from time to time but MJA suggests that this is not routinely the case. Our profiling of our client base suggests that large one-off projects are an occasional feature of large, diversified groups such as mining houses and engineering firms. They make up but one component of their substantial, constantly evolving portfolio of innovation activities. Even when they occur, total R&D claims will invariably fall well below 10% of group turnovers in the relevant years.

This context is critically important. Just because large claims are made they do not necessarily demand further scrutiny. Moreover, many smaller companies, including those in the biotechnology, medical research and software sectors routinely have periods of R&D intensity that equal or exceed those of larger firms.

But you don’t hear an outcry about ‘whole of cure for cancer’ claims.

We need to focus on eligible R&D and eligible expenditures

In either case, ‘whole of mine’ or ‘whole of cure for cancer’, what advisers, government assessors and decision makers need to come back to is an assessment of the principles of eligibility of both the R&D being undertaken and the associated, eligible expenditures.

Under the present rules, R&D is neither more nor less eligible for government support because of the size of the expenditure on the project. This is one of the benefits of having the administration of eligibility of activities separated from the administration of the eligibility of expenditures.

Innovation Australia, in looking at the eligibility of activities, should reach the same outcome as to eligibility regardless of the expenditure involved. In fact, the quantum of expenditure should be irrelevant to the decision making process, and the provision of such information should be optional.

Similarly, the ATO should reach decisions as to the eligibility of expenditures without regard to the nature of the R&D activities undertaken. Whether they assume an activity to be eligible or request assessment of eligibility by Innovation Australia, the outcome should be no different for the taxpayer.

We need an end to the innovation policy vacuum

The Minister for Innovation, Industry, Science and Resources has repeatedly said that “in the twenty-first century, innovation policy is industry policy“. To date, though, most of his actions have been around very traditional industry policy areas: automotive; textile, clothing and footwear; and university research.

The current global financial crisis has affected the speed with which a cogent response to the recommendations of Venturous Australia can be prepared. But if we are going to see a ten year innovation policy announcement from the government it’s going to need some level of consultation and analysis.

Ideally, there will be an opportunity to engage on topics that span policy, politics and administration, as a ten year policy will likely need some level of bipartisan, industry and administrative support to be well received and executed.

Most of all we need fair interpretation for program certainty

It is unfair that applicants for the R&D tax concession need to address a loaded and vague term like ‘whole of mine’ when defending their claims.

It is even more unfair when they need to do so because administrative decision makers are interpreting future policy signals from a government-initiated review of the National Innovation System when there is no policy response.

Just imagine if this level of misinterpretation was at work in the United Nations General Assembly.

Perhaps there would be demand for people to interpret English to English after all!

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 peforming, or how we could improve.

Filed under: MJA Update Articles
Tagged: Assessment, Audit, Cutler Review, Innovation Australia, National Innovation System Review, Policy, R&D Tax Concession, Venturous Australia