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
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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
MJA National Innovation System Review Submission
As you are aware, MJA has prepared a submission to the National Innovation System Review. We have, by necessity of space and expertise, focussed on the R&D tax concession and have mentioned briefly the Commercial Ready grants program.
Download Our Executive Summary
We are delighted to make a copy of the Executive Summary of our submission available for download ahead of its release on the Review’s website.
You can obtain your copy by clicking here and confirming your details.
You might also like to review some of the recent posts at our blog, Innovation Is Industry Policy.
What level of after tax benefit would influence the project decision making process in your company?
One of the points in our submissions, and an area for the specialist R&D tax and tax working group to consider is the rate of benefit from the tax concession (the permanent cash difference it creates).
There is an argument that the amount of the benefit should exceed the cost of capital in the organisation and represent a certain benefit over the life of the project to have a positive influence and end up in capital and other planning processes.
At the moment the rate for the basic concession sits at 7.5%. We are running a survey on the rate that would make a difference in your organisation.
You can have your say by clicking here.
R&D Tax Concession – Is It Under Threat?
The Tax and R&D Tax Concession Working Group, part of the current National Innovation Review (NIR), has indicated that it intends to build on the work of the March 2007 Productivity Commission (PC) Research Report, Public Support For Science And Innovation, in its assessment of the R&D Tax Concession. Full details about the Working Group are provided at the end of this Update
At a recent Hargraves Institute session hosted by MJA, Dr Laurie Hammond, one of the five Working Group members, indicated that the Group’s intention was to not reinvent the wheel and to give due consideration to the PC’s conclusions and recommendations
We find this somewhat alarming. And if you do to, it is imperative that you register your concern by making a submission to the NIR at their website before the closing date of April 30 2008. A planned series of workshop meetings and “roundtables” will take place after the closing date. If you don’t make a submission this month, you may miss out on an opportunity to particpate in these discussions in May/June prior to the delivery of the Cutler Report, the NIR’s Green Paper, in July.
Why alarming? Well, here’s a quick reminder of what some of the PC’s key recommendations were in its 2007 Report:
- Restrict access to the 125% R&D Tax Concession to small firms only. By small firms, this was taken to mean those that turn over less than $5 million annually. The recommendation was to remove access from all other companies.
- Change the 175% Incremental R&D Tax Concession to an R&D to sales ratio, rather than the current rolling base.
- Relax the beneficial ownership requirement by allowing foreign subsidiaries that hold intellectual property abroad to have access to the incremental concession only.
This last recommendation led the previous government to rush through the 175% International Premium R&D Tax Concession. Space does not permit a dissertation on the myriad ways in which this has been the worst piece of legislation associated with the R&D Tax Concession. Suffice to say, at the March briefing sessions about how to make an ‘international’ claim, the Departmental officials admitted that it had been concluded that the new program was not likely to influence the R&D behaviour of the supposed target group of multinationals in any way.
Our clients are telling us that, beyond the small company scenario, there are too many uncertainties associated with the 175% Incremental program to incorporate this incentive into R&D plans. The only concession that can be put into project plans and approval budgets with relative certainty is the basic 125% rate. One can only imagine that this would be exacerbated by moving to a R&D to sales ratio basis of calculation. For example, if a company’s sales growth outperforms its increase in R&D spend, the incentive effect might be reduced and may even be removed. Who would make R&D expenditure plans on that basis?
strong>It is crucial that the NIR hears your views on this matter. Are you happy that the R&D Tax Working Group is using the PC report as its starting point? We are certainly very concerned about this approach and will be saying so in our submission.
National Innovation Review – The Tax and R&D Tax Working Group
The Working Group is dedicated to the review of the R&D Tax Concession scheme including the R&D Tax Offset.
It will consider the R&D Tax Concession within the broader context of the impact of the overall tax system on innovative activity. It will also consider the role of the concession in the context of the overall innovation system, having regard to other program options.
The first meeting was held on 18 March 2008 and broad discussions were held regarding the following:
- the objectives of the R&D Tax Concession
- what about the program is currently working and what is not currently working in terms of factors such as eligibility of activities
- innovation in the services industry and the role that the concession could play in this
- data and information needs of the Working Group
The Group’s work will be incorporated in the overall Cutler Report due in July. In response, the Federal Government will deliver a White Paper in October/November.
The members of the Working Group are:
- Dr Terry Cutler (Chair), Principal, Cutler & Co.
- Dr Nicholas Gruen, CEO, Lateral Economics
- Dr Laurie Hammond, Director, iQ Capital Management
- Dr Peter Burn, Associate Director, Australian Industry Group
- Mr Graeme Davis, Department of the Treasury
Dr Hammond indicated that the following list of questions is a good indication as to where the Working Group will be directing its thoughts. These questions form a good basis for framing a NIR submission on this matter. They are as follows:
1. What other tax treatments/instruments are an incentive or disincentive to undertaking R&D and broader innovative activities?
2. How can we adjust these tax treatments/instruments to better support R&D and innovation?
3. Should the R&D Tax Concession be used to encourage collaborations between industry and universities/researchers?
4. How can we use the tax system to encourage increased skills development and training?
5. What non-R&D tax incentives would support your firm’s broader innovative activities?
6. What can we learn from other countries’ approaches?
7. How can international linkages and more R&D by multinational companies in Australia be encouraged? What will most induce this overseas investment?
8. Are there R&D activities that you undertake that are currently ineligible under the R&D Tax Concession?
9. Are there eligible R&D activities of the R&D Tax Concession which you feel are inappropriate or open to misuse?
10. If the R&D Tax Concession was removed tomorrow, what impact would it have on your R&D expenditure now and into the future?
11. What R&D Tax Concession rate do you think is needed to stimulate significant new R&D expenditure?
12. Is it the corporate tax rate or the rate of the tax concession that makes the difference to your R&D activities?
13. Pros/Cons of tax concession versus grant program in targeted areas?
14. What difference would it make if the R&D Tax Concession were changed from a deduction to a credit? (i.e. a percentage of R&D expenditure is deducted from tax payable)
Review of the National Innovation System
The Review Process
On 22 January 2008, the Minister for Innovation, Industry, Science and Research, Senator Kim Carr, announced a wide-ranging review of ’s national innovation system to be conducted by an expert panel chaired by Dr Terry Cutler.
By examining the large number of government innovation and industry assistance programs, the panel aims to identify gaps and weaknesses in the innovation system and develop proposals to address them. The Panel is to give regard to relevant reports and studies, including the Productivity Commission’s Report on Public Support for Science and Innovation. The panel will largely focus on:
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Developing a set of national innovation priorities to complement the national research priorities, ensuring the objectives of research programs and other innovation initiatives are complementary. Identifying regulatory and other barriers to innovation and recommending ways to minimise these. Examining the scope for simplifying and reducing program duplication and ensuring that any support provided is well-targeted and easy to access.
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Considering the appropriateness, effectiveness and efficiency of the Research and Development (R&D) Tax concession Scheme in promoting innovation and make recommendations to improve innovation outcomes.
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Considering ways to improve the governance of the national innovation system to support higher expectations of government agencies and industry.
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Assessing the appropriateness, effectiveness and efficiency of the Cooperative Research Centres (CRC) Program and make recommendations to improve innovation outcomes.
Going Forward
The review will take six months and it will provide its report (a Green Paper) to Government by the end of July 2008.
The Panel will release an issues paper very shortly. The issues paper will invite written submissions from stakeholders.
In March 2008, a series of consultation meetings will be held with stakeholders according to the following timetable:
- 3rd March – Brisbane
- 5th March – Darwin
- 6th March – Perth
- 7th March – Adelaide
- 11th March – Melbourne
- 12th March – Hobart
- 14th March – Sydney
- 17th March – Canberra
The Government will publicly release the Green Paper shortly after it is received in July 2008, and will invite comments from stakeholders on its findings.
The Government will then develop a response in the form of a White Paper later in 2008.
The Review Panel Members
The review panel comprises:
Dr Terry Cutler, (Chair), CSIRO Director and Chair of the Advisory Board for the Centre for Excellence for Creative Industries;
Professor Mary O’Kane, Executive Chair of Mary O’Kane and Associates;
Dr Megan Clark, Vice President Technology, BHP Billiton;
Professor Glyn Davis, Vice Chancellor, University of Melbourne;
Professor Steve Dowrick, School of Economics, Australian National University;
Professor John Foster, School of Economics, University of Queensland;
Dr Nicholas Gruen, Chief Executive Officer, Lateral Economics;
Ms Narelle Kennedy, Chief Executive, Australian Business Foundation;
Ms Catherine Livingstone, Former Chair of CSIRO and Director Macquarie Bank and Telstra;
Dr Jim Peacock (ex-officio), the Chief Scientist;
Ms Patricia Kelly (ex-officio), Deputy Secretary of the DIISR.
Next Step
This is the opportunity to ensure that government’s agenda for the R&D tax concession and the broader innovation funding system are reflective of what Australian industry needs.
There is little doubt that the battle will be lost if corporates take a back seat in the review.
Contact us now and we will include you in our research and submission process and with regular updates.
- 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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