The Strategic Examination of Research and Development (SERD) has released its third issues paper RD&I incentives: Incentivising breakthrough innovation and ambitious R&D. It is calling for responses by 30 September to the following questions:
- Tell us which of our proposals will work well
- Tell us what could be improved and how
MJA will be responding comprehensively to the document and will attach our response to a subsequent MJA Update.
The paper includes some comments about the introduction of other forms of incentives (e.g. grants, convertible notes and accelerators) but it largely focuses on potential changes to the R&D Tax Incentive (RDTI).
At the conclusion of the paper, the following summary comments are made regarding the RDTI:
“The R&D Tax Incentive would be more impactful with clearer eligibility criteria
- Department of Industry, Science and Resources (DISR) analysis reveals that 86% of businesses surveyed rely on third-party intermediaries, such as R&D tax consultants, to access the RDTI. This dependence indicates the program remains overly complex, creating barriers for participation and reducing the net benefit of the incentive.
- The current definition of R&D used for RDTI eligibility is considered too complex by many. Similarly, many consider the current definition does not adequately reflect the modern reality of business R&D processes.
- Some businesses seek loans from third party financiers to fund early-stage R&D, highlighting the importance of timely financial support. Reliance on third party support limits the impact of the RDTI.“
For now, we would like to make three key observations about the Issues Paper and its characterisation of the RDTI contained in the above summary.
1. Are We Putting the RDTI Cart Before the Horse?
The paper outlines a collection of potential ideas to reform the RDTI without any real analysis of how the program currently works and what the concerns are. A series of pages providing supporting evidence for the need to reform is then supplied after the recommendations for possible change. That seems to be a case of cart before the horse in the paper’s approach. The last page appears, without context, and provides the commentary on the RDTI detailed above.
In essence, the paper proposes to remove the two levels of support currently offered by the RDTI (Refundable and Non-Refundable Offsets) and develop a suite of programs including a bespoke RDTI for four categories of Australian companies:
- Ideation (Pre-revenue) Start Ups
- Scaling Start Ups
- Small to Medium Enterprises
- Large Enterprises
Compared to the current SME offering (Refundable Offset for company groups turning over less than $20 million), the paper proposes splitting those companies into three categories, albeit with no recommended levels of support or turnover ‘on and off ramps’ (to use the parlance of the paper).
It is unclear who ‘wrote’ the paper, what it was based on and what involvement the authors have had with the current program. There is a lack of rigour in what is provided. Most tellingly, the changes lack any detail as to how they would work in reality. As noted above, there are no metrics such as proposed offset rates and turnover tiers. It’s really hard to respond to reforms that have no detail regarding the benefits and operational mechanics associated with the changes. In fact, it’s virtually impossible to do so.
2. Do the Proposed Reforms Reduce Program Complexity?
In addition to the supporting evidence presented in the paper, the key reason put forward for the case for reform is to reduce program complexity.
The conclusion that the program is complex appears to be based entirely on the fact supplied by the Department of Industry, Science and Resources (DISR) that 86% of surveyed businesses use a third party intermediary such as R&D tax consultants to access the RDTI. (Full disclosure: MJA is an R&D Tax consultant.) That’s it.
We will comment on the consultant issue below, but the conclusion of complexity is used to recommend simplifying the applicable definitions of R&D and assessment processes without saying how.
MJA is of the view that the current definitions of R&D activities and R&D expenditures are well understood and simple to understand, having been in place for over 14 years and subject to comprehensive review by the courts. They may not merit any change at all in reworking the focus and support offered by the RDTI. Did someone say baby and bath water?
Where complexity does compromise the performance of the current RDTI is in areas such as increasing compliance obligations and expectations from DISR and the ATO, highly variable delivery of program assessments and audits by both regulators and a precipitous decline in collaboration between RDTI stakeholders. Yet the regulators do not appear in the Issues Paper at all, almost as though they are a frictionless component of the system.
Again, who did the authors actually talk to?
And, if you are seeking to make the RDTI less complex, how does one make sense of these examples from the recommendations:
- Scaling Start Ups – “Extend support to include eligibility for development and deployment activities, and activities to support usability and adoption of new products & services”
This seems to import a range of additional aspects to the definition of eligible R&D activities.
- SMEs – “Base ongoing eligibility on outcomes including significant revenue growth from RD&I activity”
That seems to say that if you don’t achieve “significant” growth (determined by who exactly?), then you’re out. In other words, fail at your peril in your R&D endeavours.
- Large Corporates – “Increasing or removing ceilings and thresholds in return for requirements on activity to promote engagement with broader ecosystem”
Um, we haven’t a clue what that means. Though, for once, it seems to pay to be big because there is no proposal that ongoing participation needs to be anchored to revenue outcomes connected to the RDTI-supported work as has been recommended for the SME category.
The recommendations go on to posit different levels of support for R&D in nominated priority areas and for collaborative R&D with the public sector, and to offer advance payments and remove clawback for some small taxpayers and not others.
How would we summarise the recommendations for change in the Issues Paper?
They ADD several layers of complexity.
3. Aren’t Consultants the Real Problem Here?
Here’s the part where we make our case as we try and counter the argument that R&D tax consultants are a hindrance, holding back Australia’s innovators. Well, you had to expect us to do so, given one thing the paper is very clear about is its continuously expressed view that there is a need to reduce reliance on consultants. (Just who did they speak to?)
The RDTI is a self-assessment program delivered through the Australian taxation system. The program involves the combination of information from both technical and tax dimensions and necessitates interaction with two government agencies. And the program is optional. Companies elect to increase their tax risk by claiming. If it is a given that most Australian companies seek third party advice regarding their general company tax returns, then surely it follows that they would do the same when claiming the RDTI.
MJA has provided advice as a trusted outsource to its clients since the commencement of the RDTI’s predecessor program, the R&D Tax Concession, in 1985. Companies don’t retain us because of the alleged complexity of the R&D definitions. They retain us because of our domain knowledge, to manage their voluntarily-assumed additional tax risk, to alleviate their concerns about the prevailing assessment/audit environment and the consequences of getting it wrong. We seek to be real partners in the innovation ambitions of our clients.
The reality today continues to be that companies who claim the RDTI with the best of intentions but who ultimately fall short of regulator approval are facing significant consequences in terms of tax debt, penalties and interest repayments.
A supposedly simpler definition and advertised assessment procedures will not obviate the need for trusted advice from third party advisers in that context.
In fact, this issue is all about trust. The SERD’s ambitions for the RDTI need to include a restoration of the collaborative environment for legitimate stakeholders including R&D tax consultants, so that the service offering of our industry can be improved in an overall sense, weeding out the bad actors and lifting the game of those that need to significantly improve to stay relevant and valuable.
Next Steps
MJA’s submission to the SERD focussed on some immediate opportunities to lift the performance of the RDTI to improve private sector innovation now, along with suggestions for legislative changes to make the program more fit for purpose. We also recognised that legislative reform can take several years to become law. Yet the Issues Paper did not offer one suggestion about ways in which the program operating today could be improved. Not one.
We see the Issues Paper as a clear signal that the RDTI stakeholders need to be brought together as a matter of urgency as part of the current SERD deliberations.
We are reminded of the rigour and detail involved in the 2008 Cutler Review of the National Innovation System that resulted in the current RDTI provisions. It’s time to go back to that measured approach that considers how the program operates in the real world, rather than someone dropping from the sky a more complex multifaceted program that will inevitably get mired in the corridors of Parliament while the current provisions are left to underperform.
Should you wish to discuss any aspect of this article, do not hesitate to contact MJA.