Are We There Yet? Are We There Yet? Are We There Yet?
“If you kids don’t keep quiet, I’ll turn this car around and there will be no Duff Gardens for you!”
Sound familiar? I guess we all have a time where we are the impatient passenger or the beleaguered driver.
Well, it’s no different for those on the R&D Tax Credit bandwagon.
The answer regarding the Credit is, of course, no. We’re not there yet. But now is a good time to review the situation as the entrance gates loom into view.
Flicking the On Switch
The Credit will be available for Australian taxpayers for their first income year from 1 July 2011 onwards. As indicated in a previous MJA Update, the Bill is expected to shortly pass the Senate with cross-bench support. Our current understanding is that the Bill will be introduced by the Minister for Innovation, Industry, Science and Research, Senator Kim Carr, in the week commencing 15 August 2011. The only certain change to the current form of the Bill will be the introduction of quarterly payments for the Refundable Credit from 1 January 2014. But more on that later.
I Need To Change My Systems And I Need To Change Them Now
This Credit has been a long time coming and it’s understandable that companies are anxious to get cracking with training and shiny new systems. We counsel against this. We have been dealing closely with AusIndustry and the Australian Tax Office (ATO) in recent weeks and it is fair to say that detailed guidelines for the new program are several months away. Further, there may well be revisions to the scope and operation of certain aspects of the program such as the feedstock provisions. That currently leaves us with the legislation and an Explanatory Memorandum of somewhat dubious quality. And a whole stack of questions. Now, we will be resolving to ensure that those questions are fully answered in that guidance material. In the meantime, we suggest that intending claimants continue to operate their current R&D identification systems.
The overall impact of the changes to the definitions of eligible R&D activities and expenditures is likely to preserve the breadth of eligible projects but wind back the extent of expenditures that attract the support. As such, we strongly recommend that you continue with your current approach and then review what proportion of your documented claim qualifies as the rules of the Credit begin to be fleshed out. MJA will be running briefing seminars when real flesh is on the bones. Right now, information sessions would be interesting speculative exercises but nothing definitive can be said. We hate to put it this way but we need to wait until we see the (Government) paperwork.
What Was That Again About Quarterly Payments?
It has been somewhat bemusing to observe the excitement being generated in some quarters about Senator Carr’s announcement that the 45% Refundable Offset will be available in a quarterly payment form. Bemusing because it was a proposal initially suggested in the Cutler Report that was quickly dismissed as being totally unworkable. Even more bemusing in terms of the fact that, after a National innovation System review that began three and a half years ago, we have to wait another two and a half years for this feature to activate. No explanation has been offered about why we have to wait so long or how the system might work. Yet some are heralding this announcement as a triumph. Talk about your delayed gratification!
Diving into the blogosphere on this question about the delayed start date turned up two explanations – the system would take that long to design or someone might be having a lend of us. We’ll leave you to draw your own conclusion on that one.
Letters From The Front
We will be moving shortly into a detailed series of consultations with AusIndustry and the ATO regarding the design of the Credit and new features such as Advance Findings and sectoral guidelines. We will keep you fully informed of all developments as they happen in this new chapter in Australian innovation.
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.
It’s Not Easy Being Green
Not one person has said that all they want for Christmas is more MJA Updates on the R&D Tax Credit (the Credit). Yet we feel compelled to send you some as many critical issues still need to be resolved in order for the initiative to move forward successfully.
The best we can offer is to break up our discourse in to 3 bite-size chunks over the next 2 weeks so that we don’t add too much Christmas cheer to your inbox all at once. And then we will leave you alone to rest up over your New Year break.
First up, some reflections on the emergent role of the Greens. We will follow with a reinforcement of the key forgotten issue of feedstock and a rumination about what the new Ausindustry assessment procedures might be saying about the future operation of the Credit.
It’s Not Easy Being Green
Or so Kermit the Frog would have us believe. Well, it’s a proposition that is getting well tested early in the life of the minority Labor Government by the twists and turns in the ongoing Credit saga. As the dust settles from the latest failure of the Bills to reach the Senate before the close of Parliament for the year, the role of the Greens has emerged as pivotal.
This was always expected to be the case from 1 July 2011 as the Greens assume the balance of power in the Senate. If the independent Senators, Fielding and Xenophon, cannot be relied upon to support the Bills between February 8 (the first sitting day for the Senate next year) and June 30, then a fresh opportunity to get them through will commence on 1 July if the Government can get the Greens on board.
Let’s consider what we know about the Greens position so far.
More Argy Bargy About What Qualifies As Eligible R&D
So much of the debate to date has been about the restrictive impact of the introduction of the dominant purpose test on R&D claims. Of particular concern to the Greens might be the limitations imposed by the new regime on the development of climate change process technologies. Well, if they are, they certainly are keeping their cards close to their chest as nothing is being said publicly.
The first real indication of their position was the 150 words or so spoken by Lower House Greens MP Adam Bandt in his recent Second Reading Speech on November 22 in the debate that saw the Bills pass the Lower House. In stating that the Greens are strong advocates for government support for R&D, particularly where it reaches SMEs, he indicated that his party would support the Bills in the Lower House but would be seeking to move some amendments having engaged in “some significant consultations”.
Though the Bills didn’t reach the Senate, we did get to see the Greens amendments. Again, the focus was almost entirely on what should constitute eligible R&D activities. In summary, the Greens proposed to amend the Bills as follows:
- Limit the dominant purpose test to companies with a group turnover of greater that $20 million. (This was proposed by the Senate Economics Legislation Committee’s majority report in May 2010.)
- Restrict, by note, deductions for eligible supporting activities to those only in the year the core activity occurs thereby eliminating supporting costs that occur in the period before or after the core activities. (This a first-time proposal that would further curtail support available under the R&D Tax Credit.)
- Some “clean up” items that tidy up the Bills.
A cynic might suggest that the proposed amendments may have equally come from Treasury or the Government that would be seeking to exact some compensation (the new limits on deductions for supporting activities) for a rollback of the dominant purpose test in respect of SMEs.
So not very encouraging for critics of the Bills but at least a precedent has been set that the Greens are purporting to adopt an independent voice.
Let’s Make It Less Easy By Turning Up The Heat
Calls continue for the Bills to be put into an independent consultation process as soon as possible so that a workable new Credit could be in place and open for business by 1 July 2011. Again, we remain attracted to the idea put forward by Heather Ridout, Chief Executive, Australian Industry Group, that such a process be headed up by the Board Of Taxation. If the Government decides that its best bet is to wait until the new Senate kicks in on the same 1 July, then the heat needs to be put on all stakeholders now, and on the Greens in particular, to come the table early in the New Year.
We will be turning up the heat with respect to this proposition by continuing to push for the establishment of the consultation process as a priority. As Kermit would tell you, just because you might have the balance of power, you can’t expect life to be all fly-catching and lily pads.
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.
R&D Tax Credit – The Waiting Game Continues
The R&D Tax Credit Bills have failed to reach the Senate before the close of Parliament for 2010. The earliest that the Bills can now be voted on is February 2011.
MJA sees this as an ideal opportunity for the Government to put the Bills into an independent consultation process to address the continuing criticisms of the proposed legislation. We remain attracted to the proposal put forward by Heather Ridout, Chief Executive, Australian Industry Group, that such a review should be conducted by the Board of Taxation.
We will provide an analysis of the most recent chapter in this ongoing saga in an MJA Update next week.
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.
Commercialisation Australia
The Australian Government’s new innovation initiative, Commercialisation Australia, will be open for applications in early January 2010. This program will be administered through the Department of Innovation, Industry, Science and Research. Information and application details are now available from the Commercialisation Australia website www.commercialisationaustralia.gov.au. We will provide further information in our next MJA update.
R&D Tax Credit Issues Paper. It’s arrived and it’s a worry….but don’t panic just yet
The much-anticipated R&D Tax Credit issues paper finally arrived last Friday. The consultation paper is available on the Treasury website. And like the refrain of the old song, given that we have been waiting for the paper to appear since the Federal Budget in May, one would be justified in crooning “Is that all there is?”
The New Research and Development Tax Incentive
The first thing to note is that the paper, entitled “The new research and development tax incentive”, has been issued by the Treasury. This is a big surprise as Treasury officials did not attend the consultation sessions on the R&D tax concession held last year as part of the National Innovation Review. Furthermore, the two pre-consultation sessions held in June this year were headed up by a representative of the Department of Innovation, Industry, Science and Research rather than a Treasury official.
The impression that Treasury has taken control of the process is reinforced by the fact that responses to the paper, due by Monday, October 26, are to be submitted to the Business Tax Division of the Treasury. This is all a great worry. Is it now the case that the destiny of the Federal Government’s flagship innovation program is no longer in the hands of the government department actually responsible for innovation? This matter will need to be pursued with vigour. The process is subject to a tight timeframe as draft legislation is mooted by the end of the year.
The paper itself is an odd amalgam of decisions apparently already made and areas for discussion where there is no guidance as to what the thoughts of the authorities actually are. It includes a series of unsubstantiated assertions about the operation of the current R&D tax concession and betrays an extremely poor understanding of how business R&D (BERD) occurs. It is easy to get carried away by the disappointing quality of the paper’s analysis and it will predictably attract a firestorm of criticism from the business community with regards to the number of restrictions to eligible activities and expenditures that the Treasury appears to be advocating.
However, now is not the time to panic.
Firstly, there a number of positives to reflect on:
- Increased rates of benefits
- Removal of the complexities associated with the premium
- Extension of the rebate concept
- More generous provisions relating to overseas R&D
- Allowing foreign ownership of generated IP
- Improvements to R&D software rules
Achieving Workable Outcomes
Secondly, the huge concerns raised by the discussion regarding ‘Eligible R&D activity’ in the report need to be vented but then channelled into achieving workable outcomes. The Government needs to be reminded of the main policy game here – improving Australia’s overall R&D effort. There is a need to learn from the lessons from 1996 where the Coalition’s introduction of significant reductions to the R&D Tax Concession led to a collapse of Australia’s BERD over the next 5 years. We are already behind our competitors. Unnecessary restrictions will run the risk of Australia dropping off the back of the pack.
Businesses and Stakeholder Organisations to Have Their Say
Finally, the consultation process must be approached as a real opportunity to turn around the poor performance of the administration in program delivery in recent years. The new Credit, however defined, will fail if it is delivered by the same administrative mindset currently associated with the R&D Tax Concession. The experiences of taxpayers need to be submitted directly to the authorities so that this message is clearly heard.
MJA will be working with its clients, industry bodies and other interested parties to ensure that all the relevant issues are raised in the consultation process. We would be delighted to assist you in this regard in whatever manner you deem appropriate.
To discuss the matters raised in this MJA Update in greater detail, please contact Kris Gale 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.
- 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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