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 Issues Paper
Window For Responses Is Closing Rapidly
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.
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.
Proposed R&D Planning Changes: Good for Government – Bad for Business
R&D Plan Consultation
In the last working week of 2008 we received draft guidelines for R&D planning from AusIndustry for discussion. R&D planning has been a requirement of the R&D tax concession since 2001 and is actually part of the definition of R&D activities in the Income Tax Assessment Act 1936.
There are serious deficiencies with the current R&D Planning Guidelines, despite the consultations prior to their introduction, but they have proven to be workable since their introduction.
R&D Planning Should be a “Carrot” not a “Stick”
MJA has a long track record of supporting a component of the R&D tax concession that links R&D activities to business strategy. In fact, our first submissions on this point were made way back in 1995.
Initially, our recommendation was for companies that commit to R&D planning to be rewarded with higher rates of deduction (a “carrot”), rather than the “stick” approach adopted by government. Instead we have a system that rewards form over substance and tends to see R&D plans as a compliance documents, where the absence of a plan can lead to a claim being denied.
And so the government set out, in response to the June 2007 New Elements of the R&D Tax Concession Evaluation Report, to simplify and streamline the R&D planning process.
But “simplified and streamlined” actually increases compliance costs
The government, in requesting feedback on the draft guidelines, said “[t]he draft guidelines are simplified and streamlined in comparison to the existing guidelines”. Whilst this is true in that the document is shorter, implementing the draft guidelines in their current form has the potential to significantly increase compliance costs without delivering any further business value.
Our principal objection to the new planning guidelines is that they force compliance questions about the eligibility of possible, future, planned activities into a rigorous legalistic framework to be addressed in advance of work being undertaken.
Under the current guidelines it is sufficient to outline the program of R&D activities, the intended “Innovation” or “High Levels of Technical Risk” in the activities and the objective of the R&D project. A form was provided, but it was not intended to be prescriptive. These requirements, although favouring form over substance, were sufficient to identify potentially eligible projects (including some that may or may not be undertaken, let alone claimed).
Further proposed changes, dealing with authorisation procedures, estimation of expenditure by planned R&D activity, accompanied by a lack of detail on planning updates and frequency as well as approval of updates means that the changes proposed are far-reaching and affect organisations whether large or small.
If this guideline is approved it is a victory of means over ends; of bureaucracy over business.
MJA Submission on R&D Planning
We have written a detailed submission to goverment on the proposed R&D planning guidelines. You can download a PDF below, together with the proposed R&D planing guideline and see what the issues are.
AusIndustry Draft R&D Planning Guidelines
MJA Submission on Draft R&D Plan Guideines
Although submissions formally closed on 30 January 2009, we suspect that few corporates or other parties will have responded due to the Christmas/New Year break.
If that’s the case, and you want to make a submission to AusIndustry on these guidelines, please forward your comments either by email to rdtaxcon@innovation.gov.au with the heading “Consultation on proposed R&D Plan Guideline” or by post to:
The Manager
R&D Tax Concession Program Management
AusIndustry
GPO Box 9839
Canberra ACT 2601
How are we doing?
It’s always helpful to have your feedback on the Submissions 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.
What is the ATO up to now?
A couple of weeks ago, the Innovation Segment of the Australian Taxation Office (ATO) circulated a consultation paper regarding the operation of Section 73CA ITAA 1936 (”Guaranteed returns to investors”) in the research and development (R&D) tax concession.
Background
Section 73CA was introduced in 1990 to principally deal with R&D claims made by companies involved in R&D syndication arrangements. Claimant companies entered into syndicated R&D arrangements that removed most of the commercial risks to investors by guaranteeing a minimum return. The section operates to deny the concessional component to deductions based on expenditure related to R&D activities where the company is not at risk in respect of the whole or a part of the expenditure
Implications
The paper proposes scenarios beyond syndicate arrangements where it suggests that claimed R&D expenditure may not longer be considered to be at risk. The areas discussed include arrangements relating to the subsequent sale of the results of R&D activities, potential insurance payouts, guarantee/warranty agreements and grants/recoupments. However, no guidance as to how such a view could be reached is provided. Nor are any concrete examples put forward for discussion.
Our Concerns
We are concerned with the overall quality of the consultation paper in that it does not state the objective or direction of the potential tax ruling nor does it provide any examples of how the ATO believes that the provisions could operate to restrict claims made with respect to certain R&D arrangements.
MJA’s Planned Submission
In responding to the paper, MJA will be submitting that the intent of the legislation is to prevent a taxpayer from getting a concessional deduction where the expenditure is truly not at risk and the return is fully guaranteed such as was the case in the old R&D syndication arrangements. Expansion of the interpretation of the legislation into the four areas highlighted above should be vigorously resisted.
And what about the timing?
Finally, our eyebrows have been raised by the ATO opening up a discussion on a restrictive view of this aspect of the R&D tax concession some 16 years after the provision was legislated! And just when the National Innovation Review (NIR) is looking at sprucing up the support offered by the R&D program. We’re reminded of the draft ruling on the old exclusive use of plant provisions that appeared 14 years after the R&D tax concession began. It appeared just prior to the Prime Minister’s Innovation Action Plan. It died a quiet death and we look forward to this view of Section 73CA doing the same as the results of the NIR emerge.
Your reactions?
If you would like your concerns included in our response, please contact Kris Gale, Managing Director, MJA on (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.
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