For those rugby league fans out there (we know there are so many of you in that camp), you will be familiar with the term ‘front loading the defence’.
In short, it means that a team will put maximum effort into their defence as soon as the opposition gets possession, rather than wait until the back half of the defensive set.
How this actually connects to front loading washing machines, I’m not too sure, but it can be paraphrased as a ‘go hard, go early’ strategy.
And this appears to be the strategy that’s being applied to the RDTI claim process.
In our MJA Update earlier this week, we provided a summary of the changes to the RDTI registration application that went live last Friday night. And there were plenty of them.
In summary, the changes have added significantly to the cost involved in completing the annual application as the form appears to want to front load the information that can be used by DISR (and the ATO) in their compliance processes by asking more and more questions now and not waiting until contact is made with individual taxpayers through a compliance system based on self-assessment.
The application now feels divorced from its primary function of getting R&D activities registered in the context of a self-assessment program. It has become an, if not the, audit document.
Overall, the application appears to be gearing up to be used as the key compliance document in determining DISR’s interaction with its customer base which it has recently confirmed will be restricted to the conduct of Examinations (read, audits) of individual claimants and the provision of economy-wide guidance material, newsletters and webinars. The main concern that comes out of this growing information remit is that there are more ways in which the issues companies have with understanding and completing the questions in a government form can result in audits of otherwise healthy claims.
The quality of your application shouldn’t be the determinant of your prospects in a formal DISR Examination. (It should be remembered that a perfectly drafted registration application will never make the described R&D activities eligible if the taxpayer actually never conducted the submitted activities.) Rather, if DISR decides to examine you, the process should begin afresh where the company’s representatives can talk the DISR team through the R&D activities claimed and provide access to the various types of evidence that support the veracity and eligibility of the claim. We appreciate that there are limits to this type of coverage that can be provided in a program with more than 13,000 participants but this is where a true understanding of R&D can be conveyed – through direct communication as opposed to an increasingly complicated arm’s length form that can be subject to confusion and manipulation. In this context, it needs to be remembered that all government audits of the RDTI and its predecessor, the R&D Tax Concession, have all concluded that most taxpayers seek to comply and do comply most of the time. Ineligible claims are a fact of life, and they must be managed as a priority but they shouldn’t be the principal driver of DISR. Getting R&D support into the hands of Australian innovators as seamlessly as possible should be the priority.
Focusing more closely on the changes made to the form, it is our surmise that 80% of the new questions have been simply ported across from the current version of the Advance Finding application, giving the document a very different tone. And there are new information fields that reflect matters not directly related to registration such as ATO concerns and specific policy imperatives.
In the new version, it now requires information including:
- Detailing information about the intended future aspects of core R&D activities including disaggregated yearly expenditure estimates. This is a strong reflection of the fact that most of the questions have been ported across from the Advance Finding application form (Question 93; Conclusions Box)
- Satisfying ATO eligibility requirements such as the “conducted for” test, albeit the language reflects more specifically the “on own behalf” test from the former R&D Tax Concession (Q60)
- Providing qualitative information about the influence of the RDTI on the conduct of individual core R&D activities. This has set off alarm bells as to how that information is intended to be used in a policy context as it is not an eligibility requirement (Q46)
- Discursive commentary is now required as to how the records you are keeping meet the supposed legal requirements attached to DISR’s views regarding documentation. There are no legislative requirements here. We have the guidance in the legal cases and it’s a fair conclusion that the new application has not explicitly taken into account the recent ART Body By Michael case which so brilliantly set out the matters concerned with RTDI evidence (Qs 54,114)
Our concern is that a new registrant would look at the requirements laid out in these questions and form a view they are ineligible as they simply don’t keep business records of the nature described as necessary in the application. This concern is consistent with recent market reports suggesting that companies are experiencing genuine difficulties around their documentation proving satisfactory in DISR Examinations. The taxpayers can demonstrate that they have kept and can provide records, but DISR is not accepting that their records meet the supposed eligibility requirements.
This increase in the front loading of the claim process runs the risk of hitting tipping points in the market about how companies approach registration (utilising technologies such as AI) and whether they participate at all, as growing compliance costs and the reality of ‘no reviews, audits only’ come to be better appreciated in the market.
Adding complexity and compliance cost to program participation does not provide an incentive to lift R&D effort. It’s a deterrent to those wanting to participate.
How does this initiative match up with the stated aims of the current Strategic Examination of Research & Development which is seeking to double Australia’s innovation effort?
How does it match up with the current Productivity Roundtable calling for the reduction where possible of government red tape?
There are bad actors in the RDTI. There always will be, but they do not represent the vastly majority that are compliant. Front loading the entry point to an annual claim with more and more lines of enquiry stands in stark contrast to an elegant self-assessment program where companies need to be ready to have reasoned and reasonable response, when subject to review, for regulators that surely want a sensible balance between incentive and compliance for bona fides taxpayers. An inelegant response to one or two of the expanding array of compliance questions that results in a full claim audit is not the way to keep the program clean.
This new application form was barely the subject of consultation back in 2024. Let’s use this release as a mechanism to get the stakeholders back to the table meaningfully and find ways to make the RDTI more fit for purpose so that the system attracts bouquets, not brickbats, from the likes of the SERD and the Productivity Roundtable.
We need to restore and build trust between the parties and deliver the RDTI in a manner that adds to the public good. It is time for a rethink.