R&D Tax Incentive: Welcome to the Seven(ish) Year Itch Club

October 13, 2017 Kris Gale

The R&D Tax Incentive (the Incentive) launched in its present form in the middle of 2011. Since that time, Australia’s Business Expenditure on Research & Development (BERD) has been rising steadily, matched by a spectacular growth in the number of companies claiming the Incentive, whereby program participation has nearly doubled, driven by a high uptake in the Refundable R&D Tax Offset offering annual cash payments to loss-making companies performing R&D with a turnover less than $20 million .

Growth in participation has meant growth in program costs, so savings measured were introduced by the Government in 2015 ($100 million R&D expenditure claim limit) and 2016 (across-the-board offset rate cut of 1.5%). And the R&D Tax Incentive Review, known as the ‘Triple F Report’, was tabled and recommended further restrictions. The program has recently been benchmarking as a victim of its own success.

A lull has developed this year with no further announcements. The 2017 Federal Budget came and went without any changes to the Incentive. However, we understand that the Assistant Minister for Industry, Innovation and Science, Craig Laundy, is now actively considering the recommendations in the Triple F Report in the absence of the Minister, Arthur Sinodinos, who is on medical leave. (We wish him a speedy recovery.) The MJA Update will fill you in on any developments regarding the report as they come to hand.

However, it seems that the policy lull has not been matched by a lack of activity in the space generally. The Australian Bureau of Statistics recently released the BERD figures for 2015/16 reporting an alarming drop in overall spending, falling to levels below 2009/10. Meanwhile, AusIndustry is reporting a decline in the cost of the Incentive. The amount of expenditure registered to date for 2015/16 is lower than in the previous year. The decline in R&D investment is mostly due to large businesses claiming around one fifth less than in 2014/15, while SMEs increased their R&D expenditure. In short, the reduction in BERD may be explained by a number of factors but the impact of the recent program cuts described above can’t be discounted.

It is also apparent to all program stakeholders that recent risk assessments and audits by both regulators, AusIndustry and the Australian Taxation Office (ATO), have raised concerns about program integrity and outcomes.

A clear issue is the quality of service provision available in the market place. As discussed in previous editions of this Update, the fact that a service provider has R&D tax agency status is no guarantee that they will deliver competent, let alone useful, guidance to their clients. At the very sharp end, the news this week of a tax agent being jailed for fraudulently obtaining Incentive funds is of concern to all responsible service providers. MJA fully supports the investigation of all potential measures to prevent this form of system abuse.

In the same spirit, MJA believes that the current assessment processes operated by AusIndusty and the ATO merit a comprehensive review as we hit the itchy seven year mark in the availability of the program. We have always had positive interactions with both regulators and are very appreciative of these relationships. However, we are increasingly being approached by companies, large and small, and R&D tax agents, large and small, for our opinion on the conduct and the outcomes of AusIndustry and ATO reviews. At times, we have to give feedback that the claims prepared for companies by certain R&D tax agents are not able to be supported. However, on other occasions, we are encountering the disallowing of well argued, well documented claims on unclear and sometimes spurious grounds, a case study of which was presented by Robert Gottliebsen in The Australian earlier this week. We sense an erosion of confidence in the program and growing disquiet as a result.

The experience of the growing pains in the program described here are nothing new. The Incentive’s predecessor, the R&D Tax Concession, followed a similar pathway after its introduction in 1985 – promotion and growth, then administrative challenge and value cuts, culminating in an alarming drop in BERD in the late 90s. It took an Innovation Summit in 2000 to restore the credibility of the program. We would suggest that the consideration of the Triple F Report should include a review of program delivery and integrity measures currently being employed by the Government. Some stakeholder public consultations would be a vital component of this. In subsequent Updates, we will reconsider some areas of particular concern, namely software R&D and claim documentation requirements, to help stimulate that consideration and ultimately remove the seven(ish) year itch.

We would greatly appreciate any perspectives you would like to share on this critical innovation issue. Do not hesitate to me via email, kris.gale@mjassociates.com.au or phone 02 9810 7211.