http://mjassociates.com.au/category/mja-update/The R&D Tax Credit Exposure Draft
Has Treasury Given Us What We Always Wanted or Just Another Pair Of Socks?The
Treasury Consultation Paper, The new research and development tax incentive,
released in September 2009 was a great disappointment to the Australian R&D
community.How do we know this?Because 165 submissions to the Treasury were made
publicly available and they virtually all rejected the proposal to tighten the
definition of R&D.We then sat back and waited to see Treasury’s response. Well,
it arrived last Friday just in time for Christmas in the form of the Exposure
Draft of the Tax Laws Amendment (Research and Development) Bill 2010.
Naturally, we couldn’t wait a week to see what was inside and so we opened it
up, hoping that the views of the community had been heeded. Sad to say, there
wasn’t a shiny new toy inside. Rather, a pair of socks was all to be found. And
not very colourful ones at that.The key proposals are detailed below and, while
the news is not all bad,
the new R&D Tax Credit proposed by the Treasury seeks to legislate a
considerable narrower definition of R&D coupled with augmented feedstock
provisions that would combine to remove any real incentive effect at the
critical phases of all R&D projects – the times where decisions are made as to
how much expenditure to commit to a project. Along with this minimised
incentive effect, the new legislation introduces a slew of new concepts and
requirements that add a huge amount of complexity to the program, couching it
in language that is confusing and not relevant to technical personnel and again
dropping the responsibility for the claim squarely in the lap of the company’s
taxation team.Ironically, lack of incentive effect and complexity were the very
forces that drove the Cutler Review in recommending changes to the current R&D
Tax Concession such as the removal of the incremental concession. The proposed
new R&D Tax Credit fails in both these
regards. In short, it is an incentive designed to encourage companies to do
R&D outside their normal operating environments and only reward failures which
can only be determined after the fact. It is not interested in assisting
companies that seek successful R&D outcomes in commercially-driven
environments. As such, the policy drivers expressed in the Exposure Draft
become impossible to understand.The Treasury has given interested parties until
5 February 2010 for responses to be submitted.Interested parties are invited to
comment on the exposure draft legislation and associated explanatory material.
While submissions may be lodged electronically or by post, electronic lodgement
is preferred. For accessibility reasons, please submit responses sent via email
in a Word or RTF format. An additional PDF version may also be
submitted.Address written submissions to:
General Manager
Business Tax Division
The Treasury
Langton Crescent
PARKES ACT 2600Email: rdtaxcre...@treasury.gov.aumja will be making its own
submission and is fully available this week and then from January 4 onwards to
discuss any questions and concerns that you may have. We will also be liaising
with companies and their industry representatives in their direct dialogues
with the relevant politicians and their offices. We will keep you updated
regularly on progress.In the meantime, we wish you all the best for the
Christmas season and for a very successful 2010.Here’s hoping that you don’t
receive too many more pairs of socks!! Key Proposals in the Exposure Draft and
Explanatory MaterialsThe release of the Exposure Draft and Explanatory
Materials in respect of the Tax Laws Amendment (Research and Development) Bill
2010 confirms the Treasury’s policy intent that first appeared in its September
2009 consultation paper regarding the new R&D Tax Credit. The new incentive
will replace the R&D Tax Concession for
income years commencing from 1 July 2010 onwards. It is immediately apparent
that the draft legislation has paid scant attention to the concerns expressed
by the overwhelming majority of Australian stakeholders who responded to the
Treasury’s previous paper.As promised, the proposed amendments to the current
R&D Tax Concession legislation will deliver a 45% refundable tax credit to
small firms (group turnover less than $20 million per annum) and a 40% credit
to companies with a group turnover more than $20 million per annum. The new
program will be extended to support R&D activities undertaken in Australia by
foreign-owned firms and the complex 175% premium and international premium
concessions will be abolished. Importantly, it will provide better certainty
in respect of the level of support by its detachment from the corporate tax
rate and through the introduction of an amendment period of 4 years which will
be binding on the Commissioner.Where
the proposed new R&D Tax Credit falls short is in its failure to address the
drivers that will deliver a meaningful and effective program to stimulate R&D
in Australian businesses operating in a commercial environment and within a
broad range of industry sectors.This inherent failure is immediately evident in
the revised “Objects” clause which states: The object of this Division is to
encourage industry to conduct R&D activities that might otherwise not be
conducted because of technical uncertainty, in cases where the knowledge gained
is likely to spillover to the benefit of wider Australian economy.To any
company operating in a dynamic, competitive, consumer-driven market within a
global context, this statement falls well short of the mark in describing how
R&D decisions are made. Any credibility is further eroded by the proposed
introduction of a “dominant purpose” test in respect of supporting activities
as outlined in the following
Objects clause: The tax offset is also available for directly related
activities that are conducted for the dominant purpose of supporting such core
experimental activities (rather than for a broader commercial or other
purpose).This myopic view of industry R&D will undermine any tax incentive for
the conduct of applied research by Australian businesses. Essentially, the
program focus will be on the conduct of “research” phase activities and not the
“development” phase of activities. This equates to a meaningless incentive for
companies (large and small) engaged in process technologies where downstream
development costs and risks vastly outweigh the initial research effort
involved, especially in manufacturing and mining.The following is a brief
summary of the new legislative elements that will transition the current R&D
Tax Concession to the new R&D Tax Credit :Change to the definition of Research
and Development
Activities: Claimants will need to qualify activities as either core or
supporting. Core activities will need to display considerable novelty and high
levels of technical risk.Supporting activities will need to demonstrate that
their dominant purpose was to support the core R&D. This will add complexity,
greater uncertainty and a heightened compliance burden for most
companies. Restrictions on claim value: A broader list of excluded activities
is proposed and the exclusion will apply to these activities irrespective of
whether they are core or supporting. Software development has been hit
particularly hard with a significant extension of the ‘multiple sale’
requirement along with other new restrictions. New augmented feedstock rules
seek to clawback the majority of claimable expenditures wherever the R&D
outputs generate value beyond their inherent worth as IP. The proposed
feedstock adjustments will require the exclusion of R&D
expenditure (currently other than for conceptual design) and depreciation
amounts that directly relate to the production of a feedstock output. There is
also a concern about the operation of an “expenditure not at risk”
exclusion.Innovation Australia’s role: The proposed amendments to the function
of the Innovation Australia Board will provide it with much wider powers in
respect of program administration. While R&D plans will no longer form part of
the definition of R&D, the amount of information apparently required from
companies to ensure registration will impose a severe compliance burden. A
mechanism for advance findings regarding R&D eligibility has been announced.
The introduction of program fees is also contemplated.ConclusionThe draft
legislation has paid scant attention to the concerns expressed by the
overwhelming majority of Australian businesses who responded to the Treasury’s
earlier consultation paper. The result is an R&D tax
incentive that is far more complex and greatly reduced in value as rather than
“simplified and enhanced”.The deadline for the next round of submissions is
Friday 5 February 2010.
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