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29 Nov 2019 Regarding Senior Tax Counsel’s article on research and development

Editor’s note: Bob Deutsch’s recent article “Research and development – a new way forward” can be found in TaxVine 45 (22 November 2019). 

MEMBER 329 writes: 

G’day Bob, 

Your comments in TaxVine 45 regarding changes to the R&D tax concession are downright dangerous. 

Your suggested rifle approach targeting the concession to medical research and renewable energy may have some popular appeal. However, in my view there is no better way of spending taxpayers’ hard earned dollars than the current shot gun approach spraying money at any business prepared to pay an adviser a 20% success fee for cobbling together an R&D claim to recoup sunk costs on activities that would have been undertaken whether the R&D tax concession existed or not. 

MEMBER 330 writes: 

Hi Bob, 

Hope you’re well. 

I am writing in response to the comments on the R&D tax incentive within TaxVine 45

I appreciate you raising concerns around the current operation of the R&D tax incentive, however as a long time specialist R&D tax adviser and member of The Tax Institute, I disagree with some of your points, particularly in respect of changing the programme’s design to favouring grants in specific industries. 

I am of the view that the perceived lack of effectiveness in the R&D tax incentive, and the decline in Australia’s relative investment in R&D can largely be attributed to a lack of stability in the current R&D tax programme. 

Since the introduction of the R&D tax incentive in FY12 offering a 45%/40% offset, the programme has been used as a political/budgetary football, and has now been subject to multiple proposed and actual legislative changes, including: 

Legislated cuts: 

  • $100M cap on annual expenditure (Tax Laws Amendment (Research and Development) Bill 2013);
  • Reduction in the refundable offset from $0.45 to $0.435 (Budget Savings (Omnibus) Bill 2016); 

Proposed cuts suspended based on economics review committee recommendations: 

  • Reduction in the refundable offset from $0.435 to $0.41 (Treasury Laws Amendment (Research and Development Incentive) Bill 2018);
  • Further future reduction in the refundable offset from $0.41 if the company tax rate reduces as is planned (Treasury Laws Amendment (Research and Development Incentive) Bill 2018;

Caps and intensity threshold reducing tax saving for non-refundable offsets from $0.085 to $0.04 for companies with intensity less than 2% (Treasury Laws Amendment (Research and Development Incentive) Bill 2018). 

The impact of these changes is compounded with the widely publicised tightening on the application of the R&D tax legislation by the ATO/AusIndustry (https://www.innovationaus.com/2019/05/RD-tax-audits-are-killing-startups) commencing around February 2017. During this “crackdown”, longstanding interpretations around what was eligible (in terms of activities and expenditure) were no longer accepted, and calculation methods previously approved during audits (eg apportionment of overhead expenditure to R&D such as rent based on a ratio of a company’s R&D hours) were suddenly ineligible, despite there being no legislative change to the definition of eligible expenditure or activities. 

The R&D Tax Incentive now enters a period of continued uncertainty: 

  • Treasurer Josh Frydenberg told the Sydney Morning Herald and The Age in recent months that the R&D reforms that were raised as being of concern by economics review committee have not been shelved for good, and may be introduced;
  • Innovation spokesman Clare O’Neil in the past fortnight has expressed concern over the R&D tax incentive’s effectiveness, and that a system based on direct grants may be preferable. These comments came despite the Labor party’s pledge by Kim Carr during the May 2019 election campaign that:
- Labor would seek to double the number of companies registered for the R&D tax incentive;
- Labor was committed to the preservation of the R&D tax incentive; 

This turmoil would understandably have a negative impact on the confidence and willingness of companies to undertake investment in long term projects with confidence that legislated entitlements would be available in the future. This notion is supported by academic research and the pleadings from our industry leaders that R&D tax incentives are most effective when they are stable and certain (https://www.afr.com/politics/csl-cochlear-warn-rd-tax-change-will-cost-jobs-20190130-h1an2n). 

Proposal in respect of transitioning the incentive to a direct investment grant scheme (as opposed to a broad based, self-assessment programme) are of concern, as a grant-based programme would: 

  • Potentially add to red tape and cost of administration for the government’s grant assessors;
  • Add to time lag for the period required to determine eligibility and access to funds;
  • Reduce certainty given that companies who start up are not guaranteed access to funding (based on a defined criteria) without going through a lengthy assessment process.

While the current R&D tax incentive is by no means perfect, rather than making industry endure more turmoil from change, we would propose a better approach would be to correct flaws in the current programme and political environment by: 

  • Introducing measures to maintain integrity of the programme such as:
- Mandatory reviews for first time claimants, or refundable offsets over a certain magnitude;
- Qualification and specific training requirements Advisors preparing R&D Claims;

Using pressure from industry leaders to seek to achieve political consensus around a commitment to stability of the programme. 

Happy to discuss if you have any comments.

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