The New R&D Tax Incentive: Integrity Measures – It’s A Two-Way Street

May 11, 2018 Kris Gale

In this final “Budget Special” MJA Update, we look at the integrity measures that were announced last Tuesday night. The Government has acknowledged that the majority of taxpayers do the right thing but it contends that some claimants, spread across all industry sectors, have engaged in behaviour such as incorrect self-assessment of eligible R&D activities, exaggerating their expenditure claims, “pushing the boundaries” of the interpretation of the R&D definition and engaging in other forms of non-compliance.

MJA agrees that these behaviours are occurring and fully supports strong measures to prevent program misuse. However, we contend that incorrect self-assessments are a separate matter and should be regarded and handled differently. Further, any review of program integrity must include the behaviour and the performance of the two regulators, AusIndustry and the ATO. The recent Four Corners/Fairfax Media investigation raised systemic concerns in this area and they should be transparently addressed at the same time. The Budget’s call for improved program integrity provides the perfect opportunity to do that.

Context

As we have highlighted in many previous Updates, the proposed cuts to the R&D Tax Incentive (the Incentive) are being made in an environment where the cost of the Incentive is falling (the combined effect of the $100 million annual claim cap and the 1.5% offset rate cut) and where Business Expenditure on Research & Development (BERD) is falling (12% in 2015/16 according to the ABS figures).

Now, the Government believes that further “reform” is necessary to reward additional investment in R&D while also ensuring the integrity and fiscal affordability of the Incentive. And, that “reform” is designed to save an additional $2.4 billion in the next four years. So, in other words, the Government is seeking to make a huge cut in support which is tantamount to legislating a further fall in BERD.

The measures announced are seeking to give voice to the 2016 Review Of The R&D Tax Incentive (the ‘Triple F’ report) with a passing nod to the recent Innovation and Science Australia report, “Australia 2030 Prosperity Through innovation”. It is interesting to note in that context that the Treasury has indicated the Budget savings will be returned to consolidated revenue as opposed to their redirection to other innovation measures recommended in the Triple F report. Further, the Triple F’s legacy recommendation of a collaborative premium for Non-Refundable R&D Tax Offset companies has been completely ignored.

The Announced Changes

The Government has announced the following measures:

Integrity: strengthening anti-avoidance rules in the tax law so the ATO can ensure taxpayers do not avoid paying their fair share of tax by using tax schemes involving the program;
Enforcement: additional resourcing so the Government can help ensure that ineligible R&D claims are denied;
Transparency: publishing company names claiming the Incentive and the amounts of R&D expenditure they have claimed, to improve public accountability for R&D claimants;
Guidance: enabling Innovation and Science Australia to produce public findings similar to the ATO, and provide more effective, binding guidance on the scope of what is eligible R&D. This will help ensure taxpayers do not unintentionally misinterpret the meaning of the law; and
Administration: imposing a three month limit on extensions of time available from when applications, registrations and reviews are due.

Analysis

The initial reaction is that the Government is spending additional money on compliance resources for a program they are seeking to shrink by $2.4 billion over the next four fiscal years and we note that is their prerogative. However, the trouble is that the online government presence for many years now around the Incentive has had a strong theme of ‘Comply Or Die’ and there has been scant evidence of any promotion of the benefits of the program. Add to this, the genuine concerns about the current performance of both regulators in the marketplace, then the announcements have a strong sense of further crackdowns on both those who misuse the program and those who are in genuine error. To be fair, there is no announcement of resources to promote the program and encourage more R&D from the Australian corporate community so it is hard to avoid the negative connotations of the announcements.

In terms of the specific proposals, at the risk of sounding like a politician, we need to understand the detail to properly respond. For now, we are intrigued about the decision to publish company names and claims. We need to understand how the thinking here is to promote the good news stories around Australian R&D. But why is it that the expression ‘name and shame’ keeps popping into our heads?

What we can say is this. The Government has followed the sensible recommendation from the Triple F report to not change the definitions of eligible R&D activities and R&D expenditures that were legislated in 2011. It is imperative that all stakeholders come together now in the name of program integrity to re-confirm the understanding of what R&D is supported by those definitions. From this, improved, commonly agreed guidance can help inform the market place about the parameters of the program.

This is currently not happening. A well-publicised concern in recent times is the eligibility of software development where both regulators are seemingly taking a more restrictive view of eligibility some seven years after the laws were introduced and after thousands of claims have been made on an apparently different basis. There is a litany of companies who are complaining of their treatment in the current regulatory environment. These concerns must be addressed as an urgent priority under the proposed integrity measures.

MJA has worked in this field since the R&D Tax Concession began in 1985 and we have not experienced such a difficult and confusing risk assessment/audit environment. As we said earlier, throw the book at those doing the wrong thing. But why is it that bona fide companies, many of whom prepare their own claims, are being found to be deficient in some aspect of the claims and the price they pay is that their claims are being rejected outright and they are facing the likes of repayments, interest and penalties?

It used to be the case that AusIndustry and the ATO would work with these companies to get them compliant. We have been approached by a large number of claimants and their tax agents for our opinion on rejected claims and we see no evidence that the regulators are looking to help these companies get compliant. Rather, the claims are being rejected outright with the evidence of the taxpayers being blanketly rejected without analysis or refutation. Further, these companies are being actively discouraged from continuing to participate in the program.

Program integrity is a two-way street. Let’s hope that the recent announcements create an opportunity for all stakeholders to come together, review their performance and obligations under the Incentive and work toward the common goal; ensuring eligible R&D conducted by Australian companies gets the full support available. It really is not too much to ask.

Should you wish to discuss this matter further, please do not hesitate to contact Kris Gale on 02 9810 7211 or email kris.gale@mjassociates.com.au