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R&D Tax Incentive – Senate enquiry update and current audit crackdown outcomes

The recent Senate Economics Legislation Committee enquiry into the proposed R&D Tax legislation amendments has failed to produce sound economic reasons for reducing benefits to the program, in fact the enquiry simply highlighted flaws to the reform package which were totally driven by the Government’s desire for short term cost savings at the expense of Australia’s ongoing international competitiveness.

In terms of the Bill, the Senate committee has pushed back its final reporting date from the 3rd December to the 11th of February, leaving very few sitting days for the Bill to be passed. The general view is that the reforms in their current state are unlikely to be passed.

Instead, attention has now turned to the fact that a light touch self-assessment program originally designed to encourage investment in business R&D in Australia has now turned into a nightmare for many claimants, especially in the start-up software space.

Both Airtasker and Digivizer have come forward to voice their concerns about their experiences after having their prior year/s R&D Tax assessments rejected by AusIndustry after undergoing reviews on prior claims that were originally processed and paid.

AFR article – Airtasker hit by R&D tax incentive crackdown

This issue is clearly affecting other claimants with millions of dollars at stake, in most cases it will result in the winding up of the very start-up businesses the scheme was designed to assist as it was never clearly articulated from the outset that business model innovation using technology as a driver was not eligible in absence of undertaking experimental activities dealing with high levels of technical risk.

To make matters worse the scheme administrators continue to ramp up audit activities whilst also applying a much narrower definition on the eligibility of R&D activities with a far greater emphasis on contemporaneous record keeping. It’s gotten so bad that many claimants are looking over their shoulders wondering whether they should continue to make claims or worse still take the R&D activities offshore.

In addition, it has also been reported that two of the big 4 accounting firms have also been admonished for demonstrating highly aggressive claim behaviour and promoting easy access to the program without the required due diligence and proper advice provided to its clients.

AFR article – PwC slashes R&D staff after being targeted by ATO

AFR article – How CBA, Deloitte triggered the R&D incentive crackdown

As a result, it all begs the question – how can a program designed to incentivise R&D activities turn into such a nightmare for all stakeholders involved?

Simple, a clear lack of guidance around software claims has meant that eligibility in this fast-moving space has never been well understood coupled with a total lack of audit activity over the first 4 years of the program (for companies claiming the refundable tax offset) has resulted in the poor outcomes we see today.

This is all quite amazing given the early concerns that the new R&D Tax Incentive eligibility criteria would restrict participation by software start-ups, it makes no sense as to why we are where we are today as it was clearly a subject of debate when the Incentive was being first designed, it just shows that this program is a political football whereby Government can favour and flavour concepts one day (like ex PM Turnbull did by talking up the importance of incentivising the innovation start up eco-system) and then walk away when it’s not gaining any political mileage or their own compliance processes are found wanting, creating an environment of misunderstanding and uncertainty.
Additionally, the ATO may also apply a 75% penalty if a claimants application is rejected on the basis that the claimant demonstrated “reckless” behaviour, a completely unfair scenario given that they legitimately thought they were eligible, the claims and tax returns were processed for many years and they were paid in good faith and have used the funds to innovate their business – the system created this environment and the system should now resolve it before it destroys the innovation eco-system any further and creates further investment uncertainty, at a minimum all penalties should be waived.

Unfortunately, this issue is not just restricted to software R&D, it’s also impacting manufacturing and other sectors whereby scheme administrators are using blanket statements to reject applications as opposed to technical arguments – it all looks like a strategy designed to either push smaller claimants away from the program to save money (as the return is either not worth fighting for or they simply can’t afford to take legal action) OR force larger claimants to take legal action so that the administrators can rely on legal precedents to establish how the explanatory memorandum and legislation should be interpreted and applied, that’s all well and good but in the meantime the innovation community dies as it has no investment certainty.

We wish you all a very merry Christmas and hope some common sense will prevail in the New Year as an outcome of the Senate enquiry to ensure the R&D Tax Incentive mess is cleaned up and continues to provide a stable and certain investment lever for the Australian innovation community.

If you have any concerns about your participation in the R&D Tax Incentive please call:

Gerry Frittmann
Managing Director, TCF Services

Tax agents registration number 39849006
P: 02 8219 4900

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