News Flash: R&D Tax Credit Is Being Rewritten
The Treasury has announced that the draft legislation that delivers the new R&D Tax Credit is being rewritten to make it clearer and less complex.
The letter below sets out the scope of the review including five major concerns that have been reflected in the recent submission process:
- Definition of Core R&D Activities
- Definition of Supporting R&D Activities and the extension of the Excluded Activities list
- R&D activities involving software
- Registration of core and supporting activities
- Augmented Feedstock rule
To that list, MJA will be highlighting concerns regarding the Object clause, the “expenditure not at risk” provision and the changed compliance regime.
The Treasury is seeking examples of “genuine R&D” that are believed not to be entitled to support under the proposed regime and any other suggestions that parties may have. These can be submitted directly via rdtaxcredit@treasury.gov.au or MJA would be happy to facilitate any responses that you might have.
We are greatly encouraged by this news and strongly urge you to have your voice heard.
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.
MJA - Treasury R&D Letter
The R&D Tax Credit Exposure Draft
Has Treasury Given Us What We Always Wanted or Just Another Pair Of Socks?
The Treasury Consultation Paper, The new research and development tax incentive, released in September 2009 was a great disappointment to the Australian R&D community.
How do we know this?
Because 165 submissions to the Treasury were made publicly available and they virtually all rejected the proposal to tighten the definition of R&D.
We then sat back and waited to see Treasury’s response. Well, it arrived last Friday just in time for Christmas in the form of the Exposure Draft of the Tax Laws Amendment (Research and Development) Bill 2010. Naturally, we couldn’t wait a week to see what was inside and so we opened it up, hoping that the views of the community had been heeded. Sad to say, there wasn’t a shiny new toy inside. Rather, a pair of socks was all to be found. And not very colourful ones at that.
The key proposals are detailed below and, while the news is not all bad, the new R&D Tax Credit proposed by the Treasury seeks to legislate a considerable narrower definition of R&D coupled with augmented feedstock provisions that would combine to remove any real incentive effect at the critical phases of all R&D projects – the times where decisions are made as to how much expenditure to commit to a project. Along with this minimised incentive effect, the new legislation introduces a slew of new concepts and requirements that add a huge amount of complexity to the program, couching it in language that is confusing and not relevant to technical personnel and again dropping the responsibility for the claim squarely in the lap of the company’s taxation team.
Ironically, lack of incentive effect and complexity were the very forces that drove the Cutler Review in recommending changes to the current R&D Tax Concession such as the removal of the incremental concession. The proposed new R&D Tax Credit fails in both these regards. In short, it is an incentive designed to encourage companies to do R&D outside their normal operating environments and only reward failures which can only be determined after the fact. It is not interested in assisting companies that seek successful R&D outcomes in commercially-driven environments. As such, the policy drivers expressed in the Exposure Draft become impossible to understand.
The Treasury has given interested parties until 5 February 2010 for responses to be submitted.
Interested parties are invited to comment on the exposure draft legislation and associated explanatory material. While submissions may be lodged electronically or by post, electronic lodgement is preferred. For accessibility reasons, please submit responses sent via email in a Word or RTF format. An additional PDF version may also be submitted.
Address written submissions to:
General Manager
Business Tax Division
The Treasury
Langton Crescent
PARKES ACT 2600
Email: rdtaxcredit@treasury.gov.au
MJA will be making its own submission and is fully available this week and then from January 4 onwards to discuss any questions and concerns that you may have. We will also be liaising with companies and their industry representatives in their direct dialogues with the relevant politicians and their offices. We will keep you updated regularly on progress.
In the meantime, we wish you all the best for the Christmas season and for a very successful 2010.
Here’s hoping that you don’t receive too many more pairs of socks!!
Key Proposals in the Exposure Draft and Explanatory Materials
The release of the Exposure Draft and Explanatory Materials in respect of the Tax Laws Amendment (Research and Development) Bill 2010 confirms the Treasury’s policy intent that first appeared in its September 2009 consultation paper regarding the new R&D Tax Credit. The new incentive will replace the R&D Tax Concession for income years commencing from 1 July 2010 onwards. It is immediately apparent that the draft legislation has paid scant attention to the concerns expressed by the overwhelming majority of Australian stakeholders who responded to the Treasury’s previous paper.
As promised, the proposed amendments to the current R&D Tax Concession legislation will deliver a 45% refundable tax credit to small firms (group turnover less than $20 million per annum) and a 40% credit to companies with a group turnover more than $20 million per annum.
The new program will be extended to support R&D activities undertaken in Australia by foreign-owned firms and the complex 175% premium and international premium concessions will be abolished. Importantly, it will provide better certainty in respect of the level of support by its detachment from the corporate tax rate and through the introduction of an amendment period of 4 years which will be binding on the Commissioner.
Where the proposed new R&D Tax Credit falls short is in its failure to address the drivers that will deliver a meaningful and effective program to stimulate R&D in Australian businesses operating in a commercial environment and within a broad range of industry sectors.
This inherent failure is immediately evident in the revised “Objects” clause which states: The object of this Division is to encourage industry to conduct R&D activities that might otherwise not be conducted because of technical uncertainty, in cases where the knowledge gained is likely to spillover to the benefit of wider Australian economy.
To any company operating in a dynamic, competitive, consumer-driven market within a global context, this statement falls well short of the mark in describing how R&D decisions are made. Any credibility is further eroded by the proposed introduction of a “dominant purpose” test in respect of supporting activities as outlined in the following Objects clause: The tax offset is also available for directly related activities that are conducted for the dominant purpose of supporting such core experimental activities (rather than for a broader commercial or other purpose).
This myopic view of industry R&D will undermine any tax incentive for the conduct of applied research by Australian businesses. Essentially, the program focus will be on the conduct of “research” phase activities and not the “development” phase of activities. This equates to a meaningless incentive for companies (large and small) engaged in process technologies where downstream development costs and risks vastly outweigh the initial research effort involved, especially in manufacturing and mining.
The following is a brief summary of the new legislative elements that will transition the current R&D Tax Concession to the new R&D Tax Credit :
Change to the definition of Research and Development Activities: Claimants will need to qualify activities as either core or supporting. Core activities will need to display considerable novelty and high levels of technical risk. Supporting activities will need to demonstrate that their dominant purpose was to support the core R&D. This will add complexity, greater uncertainty and a heightened compliance burden for most companies.
Restrictions on claim value: A broader list of excluded activities is proposed and the exclusion will apply to these activities irrespective of whether they are core or supporting. Software development has been hit particularly hard with a significant extension of the ‘multiple sale’ requirement along with other new restrictions. New augmented feedstock rules seek to clawback the majority of claimable expenditures wherever the R&D outputs generate value beyond their inherent worth as IP. The proposed feedstock adjustments will require the exclusion of R&D expenditure (currently other than for conceptual design) and depreciation amounts that directly relate to the production of a feedstock output. There is also a concern about the operation of an “expenditure not at risk” exclusion.
Innovation Australia’s role: The proposed amendments to the function of the Innovation Australia Board will provide it with much wider powers in respect of program administration. While R&D plans will no longer form part of the definition of R&D, the amount of information apparently required from companies to ensure registration will impose a severe compliance burden. A mechanism for advance findings regarding R&D eligibility has been announced. The introduction of program fees is also contemplated.
Conclusion
The draft legislation has paid scant attention to the concerns expressed by the overwhelming majority of Australian businesses who responded to the Treasury’s earlier consultation paper. The result is an R&D tax incentive that is far more complex and greatly reduced in value as rather than “simplified and enhanced”.
The deadline for the next round of submissions is Friday 5 February 2010.
Guide to R&D Tax Concession Updated – R&D Tax Concession Rulings Withdrawn
AusIndustry and the ATO have been jointly publishing a Guide to the R&D Tax Concession for some years now.
On 6 August 2008 the ATO released an update to Part C of the Guide to the R&D Tax Concession covering Expenditure on Research and Development. This completes the June 2008 update (Version 4.1) process as Part A (Introduction) and Part B (Research and Development Activities) were released by AusIndustry recently.
Changes incorporated in the updated guide include:
- Changes to the legislation on the Tax Offset including extending right of appeal to offsets, extend the time for claiming an offset, apply the $20,000 minimum,
- Improve the allocation of the 175% incremental concession between companies within the group
- Extend the 175% incremental concession to Australian subsidiaries of multinational enterprises (MNE) where the R&D activities are on behalf of the MNE.
- Other general changes to bring the Guide up to date with current legislation and ATO views.
In the process of releasing the update, a number of older rulings were withdrawn from this date. These are:
- IT 2442: This is an early general ruling on R&D expenditure
- IT 2451: This ruling discusses investor funding of R&D and “on own behalf” issues
- IT 2552: This ruling gives a detailed guide to costing R&D expenditure.
These 3 rulings are pre-1992 rulings. As such they only gave guidance and were not legally binding on the ATO. In the Notice of Withdrawal for each ruling the ATO states that “material in these rulings which is current is now included in Part C of the Guide to the R&D Tax Concession”. “The withdrawal of [these rulings] does not mean that the views expressed in that Ruling have changed.”
However, their replacement with the Guide rather than new public binding rulings fails to maintain or improve certainty for taxpayers. Given that the ATO has recently sought public comment on a potential ruling on “Guaranteed returns to investors” (s73CA) we can expect new rulings in due course. Notably, IT 2635 on risk provisions and syndicated R&D as the last pre-1992 ruling was not withdrawn.
We are currently completing a detailed review of the updated Guide.
Contact us if you would like more information.
R&D Tax Concession Review – Are You Being Heard?
Not Another Survey
The National Innovation Review (the Review) has moved into its next phase following the close of formal submissions at the end of April (where some 670 submissions were received).
The Tax and R&D Tax Concession Working Group held three consultation sessions in May to canvass views regarding its brief to consider the overall impact of the taxation system on innovation and the particular role played by the R&D Tax Concession. These meetings were held in Sydney, Brisbane and Melbourne and were made up almost exclusively of advisory firms, though there was some industry association presence. MJA was represented at the Brisbane and Sydney meetings.
Presumably, this was seen as a good way of taking the pulse of corporates on this issue as the invited firms help prepare literally hundreds of R&D tax claims. Whilst this is certainly true, it was disappointing to learn that there are no plans to consult face-to-face with companies prior to the issue of the Cutler Green Paper in July. Instead, a survey is apparently being sent out to selected companies to help provide input to this phase of the Review.
At this stage, we are not directly aware of any companies who have received the survey. We have anecdotally heard that some have been circulated. Whilst not ideal, we strongly urge you to complete the survey if you receive one. It is critical that the specific views of corporates are taken into account. By all means, involve your adviser in its completion but it would be a shame to just hand it to the adviser to fill out on your behalf. If you are an MJA client, please let us know if you receive a survey. We are fully available to discuss your response with you.
What Next For The R&D Tax Concession?
The Working Group meetings covered a vast range of matters regarding the review of the R&D Tax Concession. They involved three members of the Working Group – Nick Gruen, Laurie Hammond and Peter Burn. Terry Cutler (Group Leader and Head of the Expert Panel) and Graeme Davis (Treasury) did not attend. Representatives of the Review Secretariat and the Department of Innovation, Industry, Science and Research were also present.
We will summarise the issues here without detailing the views canvassed. Please don’t hesitate to contact Kris Gale (details below) if you would like to discuss any aspect of the meeting.
In short, the matters raised included the following:
- According to the Working Group, additionality is the main feature required in any support mechanism
- The Productivity Commission (PC) Report is considered highly relevant by the Working Group . This is significant as the PC Report recommended that the basic concession be scrapped for all but the smallest companies (turnover less than $5 million) and that a new incremental concession be introduced based on R&D intensity.
- The merits of an R&D tax credit as opposed to the current deduction regime
- Can services innovation be supported through the R&D Tax Concession?
- Should the program be opened up to other entities such as partnerships and individuals?
- Are ‘whole of mine’ claims an intended/desirable feature of the R&D Tax Concession?
- Should private/public sector collaboration be targeted through the incentive?
- How important is location (ie. where the R&D is conducted) to the program?
- Is there scope to change the IP requirements such as the removal of the “on own behalf” rules?
In addition, a number of finer grained issues were raised including the R&D tax offset threshholds, the operation of the feedstock offset provisions, the unlimited amendment powers of the Commisioner of Taxation, software R&D, the current grouping rules and the design of the overseas R&D provisions.
MJA looks forward to a continued and close involvement in this critcal phase of the Review.
Kris Gale
Managing Director – Michael Johnson & Associates
m: 0411 171 596 | t: 02 9810 7211
