TCF Services Responds to R&D Tax Incentive Review Recommendations
Newsletter | April 2016
- Respondents & Methodology
- Summary Commentary & Responses
- Recommendations of the R&D Tax Incentive Review
- Non-Recommendations in the R&D Tax Incentive Review Report
1. Respondents & Methodology
1.1 This submission is prepared by TCF Services Pty Ltd of Level 2, Suite C, Level 2, 55 Mentmore Avenue, Rosebery, NSW 2018. The primary contact for feedback in relation to the views expressed in this submission is Mr Gerry Frittmann (firstname.lastname@example.org). Telephone 02 8219 4900 or Mobile 0413 647 664.
1.2 TCF Services provides a full-spectrum advisory service to individuals and firms undertaking innovative activities in Australia, who in turn seek to leverage the Research & Development Tax Incentive (RDTI) and other Government-provided incentives to industry. Our expertise in these latter incentives relate predominantly to the Automotive Transformation scheme (ATS), Clothing and Household textiles (Building Innovative Capability) scheme (BIC), the Export Market Development Grants scheme (EMDG) and restructured innovation incentives relating to Australian-based defence industries. Please view www.tcf.net.au for further information.
1.3 TCF Services directly employs 19 people, with over 63% of our staff holding innovation-specific technical or tax and legal related qualifications, as follows: 10 x Registered R&D Tax Agents with the Tax Practitioners Board with the following degrees – 3 x Certified Practicing Accountants with CPA Australia, 1x Bachelor of Science PhD in Chemistry, 1 x Bachelor of Law/Bachelor of Business & Commerce (Accounting), 1x Bachelor of Science (Hons) PhD in Physics, and 1 x Bachelor of Mechanical Engineering PhD in Process Engineering
1.4 This submission has been developed following an internal roundtable workshop to consider recommendations contained in the Review of the R&D Tax Incentive co-chaired by Bill Ferris, Alan Finkel and John Fraser. The roundtable drew on the collective experience of 12 TCF Services consulting staff associated with the delivery of R&D support to industry totalling 96 years, and associated with the current provision of research & development tax incentive advice to over 250 active clients per annum. The roundtable workshop was chaired by an independent person with Economics and Business Administration qualifications.
1.5 TCF Services has previously lodged submissions to the Review of the R&D Tax Incentive Discussion Paper and the earlier Senate Economics References Committee inquiry into Australia’s Innovation Systems. Full texts of these submissions can be found at www.tcfservices.net.au/xxxx.
1.6 The following commentary in response to the recommendations of the R&D Tax Incentive Review (The Review) is divided into two principal sections.
1.6.1 The first deals specifically with the six recommendations put forward in the Review, and provides specific observations and commentary on the merits of each recommendation.
1.6.2 The second section deals with a number of supplementary Findings or Alternative Policy option sets (i.e. ‘non-recommendations’) canvassed in the body of the Review report which warrant further analysis and commentary.
2. Summary Commentary & Responses
2.1 As an aid to Government in forming future policy in relation to the RDTI, TCF Services believes the Review suffers from being less than definitive in many areas, thus creating a further five months of uncertainty for industry leading through to a mooted announcement on the future of the RDTI in combination with the roll-out of a further update (Tranche 2) in March/April 2017 of the National Innovation and Science Agenda.
2.2 The Review Team’s adoption of a combination of formal recommendations and non-recommendation Findings with attached subsidiary recommendations has missed an opportunity to provide clarity in the stated preference not to make major changes to the RDTI on the premise of avoiding actions that would negatively impact investment decisions by industry relating to future research and development activities.
2.3 TCF Services is concerned that any substantive take-up of the above-referenced Review ‘non-recommendations’ risks altering the balance of existing R&D Tax Incentives between small and larger enterprises, and unless specifically addressed by government in March/April 2017, will exert a continuing negative impact on policy certainty through to the next proposed review of the RDTI prior to 2021.
2.4 TCF Services concurs with the Review’s conclusion that the RDTI falls short of meeting its stated legislative objectives in terms of additionality and spill-overs, but believes the large majority of issued identified by the Review can be addressed in the main by focusing on reform to the application process (i.e. to weed out ineligible claims), appointing a single body to administer the RDTI, and ensuring there is a properly functioning audit regime.
2.5 Following the appointment of a single body to administer the RDTI, Government should direct work be undertaken to reform the application process by commissioning a ‘Continuous Improvement Team’ populated by Departmental representatives and a broad range of practitioners from the RDTI business community (i.e. not just accounting firms), which would in turn be empowered with an on-going agenda to effect efficiency measures to the RDTI application and administration process.
2.6 TCF Services also believes that much of the debate about the role of consultants in delivering the RDTI results from an over-focusing on the incentive as a taxation concession, when the large majority of benefits paid out under the scheme are to entities which are in a non-tax paying financial position. In turn, the focus of the RDTI needs to be turned towards the encouragement of innovation which is consistent with the core objectives of the incentive.
2.7 Such an approach would better recognise the important role consultants play in assisting to minimize non-compliance across the RDTI as a whole, as well as the positive education role they play in saving applicants time and money by focusing them on advancing research and development activities with satisfy government requirements for additionality and spill-overs.
2.8 In summary, TCF Services does not support recommendations 2 and 3. In turn, we concur in the main with the sentiments behind recommendations 1, 4, 5 and 6.
3. Recommendations of the R&D Tax Incentive Review
3.1 RECOMMENDATION 1: Retain the current definition of eligible activities and expenses under the law, but develop new guidance, including plain English summaries, case studies and public rulings, to give greater clarity to the scope of eligible activities and expenses.
3.1.1 TCF Services notes that the current R&D Tax Incentive relies on a legislative base that dates back over 30 years, and accordingly has been revised and amended on numerous occasions resulting in a complex programme design that is only made more difficult for participants by having to deal with two administering agencies – Innovation Australia (via AusIndustry) and the Australian Taxation Office (ATO).
3.1.2 In turn, both AusIndustry and the ATO have been independently publishing guidance material (i.e. Fact Sheets) relating to the RDTI on their own websites for many years, with the standing volume of Fact Sheets so large, it has become confusing for firms seeking RDTI benefits. As both agencies have sought to address interpretative issues relating to the RDTI, the Fact Sheets themselves have also become overly complex.
3.1.3 The core of the problem lies in AusIndustry’s Fact Sheets dealing principally with RDTI ‘eligibility’, while the ATO’s Fact Sheets in the main address only ‘expenditure’ as it relates to tax rules. This leaves industry without any consolidated guidance to assist in forming up RDTI applications, and further, breeds uncertainty and confusion as often there are contradictions in the guidance issued by each agency.
3.1.4 TCF Services regularly experiences difficulties in advising clients on the progression of RDTI claims due to differences of opinion between AusIndustry and the ATO (including conflicting advice on their respective websites), which have necessitated additional and unnecessary costs for applicants in having to work through two agencies to resolve issues of contention.
220.127.116.11 In proposing the adoption of “plain English summaries” as the basis for future RTDI guidance, TCF Services believes the Government should ensure that such material is written as a single consolidated document that fuses the guidance material currently provided from the separate perspectives (and legal responsibilities) of AusIndustry and the ATO.
18.104.22.168 Achieving such an outcome would be materially assisted by the formation of a single lead RDTI administering body comprising representatives of both AusIndustry and the ATO (and any other relevant government agencies) which would be assigned responsibility for carriage of the RDTI.
22.214.171.124 This does not mean that each agency would not continue to retain specialist staff within their Departments to help acquit their legislative responsibilities. However, it does mean, that RDTI participants would in future only have to deal with a single administering body to acquit all their responsibilities in claiming R&D taxation-based incentives.
3.1.5 Further, in shifting to a regime where more ‘plain English summaries’ were issued by the new single lead administering body, care should be taken to avoid interpretative mistakes being made that ultimately end up changing the intent of the Parliament. As previously noted, the RDTI stands on the base of complex legislative base that cannot be dumbed-down too much for fear of encouraging non-compliant claims, even if the motivation is admirable in terms of reducing compliance costs.
3.1.6 TCF Services believes an expansion of the charter of the above-recommended Continuous Improvement Team to review agency-drafted plain English summaries would add a major clarifying element to the Review’s recommendations in regard to improving current definitions of RDTI eligible activities and expenses under the law.
3.1.7 Noting the Review’s entertainment in Chapter 4 (p 28) that it “may be possible to make relatively minor changes to the [RDTI] definition by changing a small number of words” after an additional consultation process, TCF Services would propose the following:
3.1.8 Additional improvements could be made by allowing participants to claim projects and project costs, instead of separate definitive activities. For example, many smaller firms complete multiple project activities at the same time, not one after the other. The requirement to record the conduct of each R&D activity to determine eligibility via a “directly related” and/ or “dominant purpose” test, along with the need to form a “hypothesis” represents an added burden for applicants that is not consistent with the manner in which companies normally operate.
126.96.36.199 Several deficiencies also remain in the determination of eligibility under the existing RDTI for activities in the disruptive software space. At issue is the innovative merit associated with the redesign of historical business models. For example, not all cases of innovation necessarily involve high levels of technical or scientific risk/ advancement. However, the developmental risk and manner in which these process based services are brought to market are entirely the same.
188.8.131.52 One alternative to encouraging firms to undertake more innovative activities is to require that RDTI claimants prepare a statement in the form of an innovation route to substantiating eligibility. Requiring that costs claimed should be externally audited as part of the benefit application process will also help reduce administration costs for the Commonwealth, as will a decision to nominate one lead government agency as being responsible for adjudicating on the merit of R&D claims.
3.2 RECOMMENDATION 2: Introduce a collaboration premium of up to 20 percent for the non-refundable tax offset to provide additional support for the collaborative element of R&D expenditure undertaken with publicly-funded research organisations. The premium would also apply to the cost of employing new STEM PhD or equivalent graduates in their first three years of employment. If and R&D intensity threshold is introduced (vide Recommendation 4), companies falling below the threshold should still be able to access both elements of the collaboration premium.
3.2.1 TCF Services notes the Review’s observation that subsequent growth in the level of Australian R&D activity benefiting from the RDTI has not been accompanied by a parallel increase collaborative activity between industry and Publicly Funded Research Organisations (PFROs). We also note the observation that collaboration was never included as an RDTI programme objective.
3.2.2 Observations of the R&D Tax Incentive Programme Review conducted by the Centre for International Economics (CIE Report) cited (p 75) “evident differences in perceptions between the two sides” as one factor holding back greater collaboration. The Review also noted reluctance to favour collaboration over individual efforts “could stem from a perception of high participation costs and a lack of understanding within small and mid-sized firms about the research capabilities available to them”.
3.2.3 TCF Services would add to this debate its own observation of wide misconceptions within academia about the commercial drivers behind the innovation activities of individual firms which, in the main, are driven by the need to establish/develop sustainable competitive advantage. This driver generally works against the objectives of collaboration in terms of spreading knowledge and interactions with outside partners.
3.2.4 The pros and cons and practical difficulties of collaborative R&D activities have most recently been extensively canvassed in deliberations leading up to the declaration of Tranche 1 of the National Innovation and Science Agenda, and as such, there are now multiple programmes in place – as listed on in Box 4.2 (p 33) – to encourage a greater level of collaborative activity.
3.2.5 TCF Services does not believe that the simple addition of a collaboration premium to the non-refundable tax offset – without first addressing the many fundamental barriers to furthering collaboration – is likely in itself to achieve a major increment in collaborative R&D behaviour between industry and PRFOs.
3.2.6 As such, we would err on preserving the integrity of the RDTI as it currently stands, and not support any measures designed to distort incentives for firms to focus on maximizing the volume of R&D activities conducted locally. Where collaborative activity does makes sense to industry, there are now numerous programmes under the NISA to encourage such an outcome.
3.2.7 To the extent that the interaction of general economic conditions across the economy and the availability of the RDTI work to drive firms to undertake ever more incremental levels of R&D activity, that incremental activity will in turn drive demand for scientific/technical employees, including STEM PhD graduates. As such, TCF Services believes the large majority of the existing R&D tax incentive should continue to be directed to industry and the entity undertaking the financial and commercial risk.
3.2.8 We do not believe that distorting RDTI benefits to orientate employee recruitment towards one discipline or another is a useful application of RDTI funds. If there is an acknowledged barrier to the employment of STEM PhD graduates, this could more appropriately be addressed by way of a grants programme.
3.3. RECOMMENDATION 3: Introduce a cap in the order of $2 million on the annual cash refund payable under the R&D Tax Incentive, with remaining offsets to be treated as a non-refundable tax offset carried forward for use against future taxable income.
3.3.1 TCF Services notes the Review’s projections of further growth in the cost to government of supporting the RDTI, as well as prospective growth in the cost of the refundable component for businesses with a turnover of less than $20 million potentially threatening fiscal sustainability of the incentive.
3.3.2 We believe the Review should have viewed such an outcome more positively – as an indicator of the success of the programme and AusIndustry’s promotional activities – including targeting of the vibrant start-up community and smaller enterprises known to undertake R&D activities which generate a high level of innovation.
3.3.3 We also note the observations of the CIE Report which cites data attesting to the high levels of R&D undertaken by smaller enterprises, along with the high level of additionality and spillovers generated by the R&D efforts undertaken by smaller firms, including in the generation of products or processes new to the world.
3.3.4 TCF Services acknowledges the difficulties unforeseen/unpredictable programme expenditure growth creates for government, but believes that concerns about expenditure growth can be addressed in the main by focusing on reform to the application process (i.e. in terms of weeding out ineligible claims) and ensuring there is a properly functioning audit regime.
3.3.5 Incentives to entities undertaking research and development activities have already been cut back as a result of deferred government announcements from 2014 that have only recently been passed by Parliament in the form of the Budget Savings (Omnibus) Bill 2016.
3.3.6 Companies in the under $20 million space represent the best entities within the whole R&D space in terms of satisfying government innovation requirements, and it therefore makes no sense to be capping incentives at a time when the Australian economy is attempting a challenging transition from over-reliance on the minerals and energy industries to reliance on a broader base of activities for the generation of economic growth.
3.3.7 Many small-to-medium sized entities, including the majority of start-ups, populate the under $20 million space and rely on the cash provided by the 45% refund to sustain their activities and/or undertake additional R&D activities.
3.3.8 Further, the Review provided no information as to how a cap “in the order of $2 million” was chosen, and it is insincere to argue that only a small number of firms will be affected when projected growth in local R&D activities over the next four years would see more and more RDTI participants breaching the suggested cap.
3.3.9 TCF Services suggest that without more substantial research into the impacts of the Review’s recommendation, the government may end up penalising the very segments of industry where a large majority of R&D is being carried out, and thus, may ultimately defeat the broader government objective of encouraging additionality. We accordingly recommend that no cap should be instituted for entities claiming the less that $20m RDTI.
3.3.10 Redirecting benefits from an annual cash refund to a non-refundable tax offset does not ultimately reduce the government’s liability to honour RDTI claims. It merely denies public visibility of the nation’s investment in innovation from the annual Budget Statements and three-year Forward Estimates, to a time outside the scope of the Forward Estimates.
3.4 RECOMMENDATION 4: Introduce an intensity threshold in the order of 1 to 2 percent for recipients of the non-refundable component of the R&D Tax Incentive, such that only R&D expenditure in excess of the threshold attracts a benefit.
3.4.1 TCF Services believes there is a case for the application of an intensity threshold to the R&D activities or larger firms as a means of ensuring consistency in the extension of government benefits specifically encouraging a focus on additionality in large corporate R&D programmes.
3.4.2 The practical impact of the Review’s recommendation to increase the expenditure threshold from $100m to $200m means a number of large R&D-intensive companies will retain an incentive to increase R&D in Australia.
3.4.3 If the Government is indeed to remain true to the objective of the RDTI, then the introduction of an intensity threshold targeted at firms engaging in a high level of risk-intensive R&D really will encourage firms to strive for greater additionality.
3.4.4 In turn, TCF Services suggests the adoption of a one to two per cent benchmark may be too low given there are wide variations in R&D intensities by sector as unless the R&D activities being undertaken involve higher risk (and therefore, potentially greater returns), the R&D would most likely be undertaken whether or not there was any tax-based incentive.
3.4.5 Net additional R&D in the order of one-to-two per cent nevertheless appears low. Perhaps the application of this recommendation could be better targeted if government researched the benchmark rates currently applicable to the prescribed ‘growth sectors’ that make up the Government’s current innovation policy, and then selected a higher threshold, perhaps in the order of 3-5%.
3.4.6 Having said that, the concept of an intensity threshold is likely to be difficult to administer and likely be discriminatory, unless the Government connects the threshold decision with a parallel industry policy decision to intentionally focus this element of the RDTI on the six nominated industry growth sectors.
3.5 RECOMMENDATION 5: If an R&D intensity threshold is introduced, increase the expenditure threshold to $200 million so that large R&D-intensive companies retain an incentive to increase R&D in Australia.
3.5.1 TCF Services believes the uncertainty over reduced benefit thresholds coupled with the imposition of the $100m cap to eligible R&D expenditures has clearly acted as disincentive to additional R&D activity in some sectors, and thus ran counter to Government’s RDTI policy objectives.
3.5.2 Nevertheless, the change has now been operational for two years, and therefore, whatever impacts the change has had on company decision-making in respect of undertaking additional R&D in Australia is already well down the track.
3.5.3 The Review appears to justify the need for an intensity threshold by referencing allegations of numerous ‘business as usual’ claims by large enterprises, for which no evidence is provided. In turn, we believe the elimination of ‘business as usual’ claims lends more to addressing anomalies in the registration and claim administration process. The question needs to be asked: Why has it been so that activities were registered in the first place if they were then latterly not considered genuine R&D?
3.5.4 TCF Services welcomes both of the Review’s recommendations: to increase the expenditure threshold to $200 million; as well as institute an R&D intensity threshold of three per cent with the specific intention of encouraging increased R&D activity in Australia.
3.5.5 We nevertheless note an inconsistency of argument between the recommendation to cap annual cash refunds payable for firms under $20 million in the name of ensuring ongoing RDTI affordability, and the subsidiary recommendation to increase the expenditure threshold to $200 million. Any savings in the Government’s overall fiscal position from imposition of a cap on cash refunds will no doubt be consumed by payments (in the form of taxes foregone) to larger firms.
3.6 RECOMMENDATION 6: The Government investigate options for improving the administration of the R&D Tax Incentive (e.g. adopting a single application process; developing a single programme database; reviewing the two-agency delivery model; and streamlining compliance review and findings process), and additional resourcing that may be required to implement such enhancements. To improve transparency, the Government should also publish the names of companies claiming the R&D Tax Incentive and the amounts of R&D expenditure claimed.
3.6.1 Administration of the R&D Tax Incentive in general: While TCF Services believes it is important for the core elements of the RDTI to remain stable over time, it is also important that the incentive remains able to flex with changing times.
184.108.40.206 Whatever reforms are agreed upon, we have previously suggested that they should constitute the immediate focus agenda for a Continuous Improvement Team which should have a specific directive to reduce the cost of compliance for companies, while at the same time reducing non-compliance.
220.127.116.11 TCF Services believes that the definition of R&D activities eligible under the current incentive is not fully reflective of the needs of a modern ‘Services’ economy increasingly being driven by disruptive software/firmware applied to traditional business models. In short, the RDTI needs to recognise that the imagination of alternative business models is as innovative as traditional activities in technical or scientific advancement.
18.104.22.168 The current RDTI legislation and administrative structure presents to potential participants as being overly complex in design, and too focused on tax. Most innovators are not thinking about tax when they are searching for resources to fund innovative activity.
22.214.171.124 The experience of TCF Services is that the focus on tax generally confuses the necessary discussion of how firms can best access the means to bolster cash flow in order to support innovative activities through to early-stage commercialisation.
126.96.36.199 Such challenges are only made the more difficult for participants by having to deal with two administering agencies – Innovation Australia (via AusIndustry) and the Australian Taxation Office – which provide guidance on RDTI participation only from their own specific interest, eligibility in the case of AusIndustry and expenditure in the case of the ATO.
188.8.131.52 TCF Services proposes that a single lead administrative body comprising representatives of both AusIndustry and the ATO assume principal carriage of RDTI administration. This does not mean that each agency should not retain specialist staff within their Departments to help acquit their legislative responsibilities. However, it does mean, that RDTI participants would only have to deal with a single administering body to acquit all their responsibilities in claiming R&D taxation-based incentives.
184.108.40.206 The Review notes the heavy reliance on the use of advisors and consultants in effecting their RDTI participation, but fails to acknowledge the complexity of RDTI legislation and many contradictory Fact Sheets independently penned by each agency drives prospective claimants into the hands of consultants in order to access their technical qualification and expertise to script compliant R&D activity claims.
220.127.116.11 As in any industry, the cost of applying high-level expertise must be paid for, although the tone of the Review is that such services are not necessarily delivering value for money. TCF Services submits that the Review’s estimates of fees paid to consultants are not necessarily as high as claimed when consideration is given the need to comply with legislated programme features that add complexities associated with tax, thus compounding the claims process.
18.104.22.168 Perhaps it would be more productive to consider the positives consultants bring to the RDTI process by way of delivering a higher proportion of auditable claims, marketing the programme and taking the financial risk involved with their successful delivery. On many occasions when reviewing claims prepared by third parties, TCF Services has had to remind claimants of the requirements of R&D tax incentives legislation and, in turn, adjust draft claims to ensure they are compliant with the requirements of the relevant legislation.
3.6.2 Implementing a pre-registration process: TCF Services endorses the CIE Report’s observation that developing a pre-registration process is likely to increase the standing of the RDTI in the decision-making processes of firms, and thus increase the likelihood of claims generating additional R&D.
22.214.171.124 In implementing any pre-registration process, TCF Services believes that best practices from related industry assistance programmes should be adopted, such as the requirement for a non-binding Statement of Intent for future R&D activities that are clearly linked to the company’s Strategic Business Plan.
126.96.36.199 The current time delay between the submission of claims and registration and AusIndustry’s integrity review is likely to increase the probability that a certain proportion of claims do not meet the real innovation test, and hence, present more as business-as-usual activities. TCF Services submits that by focusing on reform of the RDTI application process and more effective auditing, cost pressures in the overall RDTI could be mediated.
3.6.3 Single application process: TCF Services considers there are major opportunities to improve administration of the RDTI, including by investigating the minimum level of information required to achieve registration as part of a move to a single application process.
188.8.131.52 The opportunity should also be taken to further leverage such a reform by rationalising the redundant information mandated for supply in multiple application formats. For example, AusIndustry requires the provision of data on the firm/entity and other information, which is again required by the ATO, on top of any information required by the Australian Bureau of Statistics. Surely the provision of an ABN or Tax File number could facilitate the process of identifying firms, by agencies drawing on information already held in databases to cross-check claimants citing ABNs or tax file numbers.
184.108.40.206 In implementing any pre-registration process, TCF Services further believes that best practices from related industry assistance programmes should be adopted, such as the requirement for a non-binding Statement of Intent for future R&D activities that are clearly linked to the company’s Strategic Business Plan.
220.127.116.11 These sentiments could similarly be summed up in a Technology Roadmap that would include a technology gap analysis, development route, means of creating collaboration and a pathway to commercialisation. The technology roadmap could further include a set of milestones/stages of anticipated break-throughs such as overcoming a known obstacle or the stages of prototype development.
3.6.4 Developing a single programme database: TCF Services believes the development of a single programme database is a worthy objective, and would be made even more effective should administration of the RDTI be consolidated into a single lead administrative body. Allied to such reform would be the resourcing of the ATO to undertake much more qualitative research from income tax returns to provide AusIndustry with aggregated information on how firms are really using the RDTI. The aggregated information could be used by the single administrative body to improve both roll-out of the RDTI as well as audit activity.
3.6.5 The two-agency delivery model: TCF Services has previously submitted that dual-agency administration of the current RDTI involves unnecessary uncertainty (in relation to both eligibility and benefits) and additional costs to claimants. Dual-agency administration also relieves each organisation from having to work together in the provision of consolidated advice regarding the distribution of Fact Sheets and other interpretative materials. In its place, we strongly recommend the nomination of a single lead administration body modelled on the ‘Task Force’ most recently employed by government to advance the RDTI Review.
3.6.6 Streamlining the compliance review and findings process: TCF Services believes that following the raising of the (previously referenced) Compliance Improvement Team, it should also be tasked with seeking to reduce the effort required to achieve ‘Overseas Findings’ and ‘Advance Findings’. The CIE Report notes (p 70) via Table 5.1 notes that 38% of AusIndustry compliance resources are absorbed by the provision of overseas and advance findings.
3.6.7 Additional resourcing of administration: The integrity of any government self-assessment assistance scheme is heavily dependent upon the robustness of the claim review and audit regime imposed on applications. The majority of RDTI participants are small entities seeking the <$20m benefit, and have quite limited internal resources to devote to dealing with two administering bodies suffering themselves from a lack of resources to effect sufficient audit activity.
18.104.22.168 Compared to Canada and Singapore, AusIndustry appears to enforce a lesser level of compliance, with the impact that participants may end up not committing the required level of effort to maintain adequate records to back up their claims, and hence, the quality of claims will suffer.
22.214.171.124 TCF Services is generally supportive of the Review’s suggestion for additional resources for RDTI administration, however, believes this premise should be re-tested following the appointment of the single body to administer the RDTI, and after one full year of operations of the Continuous Improvement Team.
3.6.8 Publishing claimant names and R&D expenditures: TCF Services agrees with the Review Panel’s assessment that, consistent with best practice in the administration of other Australian Government assistance schemes, there is an obligation upon government to maintain transparency in the administration of public funds, whether they by direct grants or via reductions in tax liabilities. We therefore favour the publication of names of claimants and data providing guidance on the size of assistance being provided by taxpayers.
4 – Non-Recommendations in the R&D Tax Incentive Review Report
4.1 THE NATIONAL INNOVATION AND SCIENCE AGENDA (NISA): TCF Services welcomes the acknowledgement in the Review of the principal objective for Government intervention in research and development effort in Australian being to address market failure in the allocation of risks and rewards between firms undertaking R&D activities, and the wider Australian society.
4.1.1 TCF Services nevertheless believes it is unfortunate that the review of the R&D Tax Incentive was positioned as the last element of the package of programmes comprising the Tranche 1 of the National Innovation and Science Agenda released in December 2015.
4.1.2 We believe such positioning has fostered a perception the RDTI operates superfluous to or not fully consistent with the direction and core objectives of the NISA, and therefore must be cut back in terms of its overall cost and as a means to provide funding for successive iterations of the NISA.
4.1.3 TCF Services is concerned about the potential of the currently underway ‘additional consultative process’ on aspects of the Review’s non-recommendations other observations extending beyond its Terms of Reference to ultimately change the legislated scope of eligible activities and expenses claimable under the RDTI.
4.1.4 TCF Services also notes the Review’s recommendation (p30) that the RDTI be again reviewed no later than 2021, and no earlier unless major unforeseen faults emerge.
4.1.5 By a quirk in the appointment dates for new Senators following the 2016 Federal election, TCF Services notes the next Federal election will need to be called early (i.e. no later than May 2019) in order to correlate with Senate terms (one half of the Senate) expiring at the end of June 2019. This suggests the next RDTI review may end up being effected much earlier than anticipated by the Review.
4.2 THE CENTRE FOR INTERNATIONAL ECONOMICS REPORT: TCF Services notes the Review’s deliberations benefited substantially from the work undertaken by the Centre for International Economics.
4.2.1 The CIE Report also raised a number of questions and issues relating to the future direction and composition of the RDTI, not all of which were subsequently examined or endorsed by the Review Panel. The most prominent of these relates to the notion that the RDTI could be more efficiently and effectively replaced by an across-the-board cut in company tax.
4.2.2 TCF notes the difficulty the Turnbull Government is currently experiencing in advancing its election policy to cut company taxes across-the-board over the next ten years for small, medium and large companies. We further note the likelihood that any cuts to company tax endorsed by the Parliament may apply only to enterprises with turnovers of less than $2 million.
4.2.3 TCF Services believes the CIE Report’s observation on the potential replacement of the RDTI with an across-the-board cut in company tax, when taken in the context of the Turnbull government’s approaches to company taxation, raises a medium-term risk to longevity of the RDTI that may mature in a pre-2021 election time-frame.
4.2.4 We accordingly encourage government in its deliberations (and prospective March/April 2017 announcement) to bring down a definitive statement in regard to the longer-term regard for the RDTI, and specifically rule out the option of replacing the incentive in full with an across-the-board cut in company tax.
4.3 INVESTIGATION INTO FACTORS MOTIVATING RDTI PARTICIPATION: TCF Services notes the Review’s observation that further work could be done to identify factors motivating RDTI participation. In these respects, an opportunity could be taken to better leverage data held by the ATO, in terms of commissioning special research to elicit aggregate trends in firm behaviour from extant tax file data. Aggregate data from such an exercise could also prove useful to all current and prospective RDTI claimants if released as Case Studies.
4.4 QUARTERLY PAYMENTS: TCF Services observes the recurrence of current media calling for the institution of quarterly payments for start-ups, as well as the CIE Report commentary (p 169) that process work had already been done within the Department to implement such a change, however, the initiative did not proceed due to a change of Government.
4.4.1 TCF Services notes the initial proposal to implement quarterly payments was only to proceed some years after new RDTI claimants had achieved a track record in the submission of claim documents and required taxation records, and hence, in the first instance would exclude start-ups.
4.4.2 TCF Services has observed in several claimant interactions a tendancy for start-ups to claim for business model innovation without any technical risk, thus leading to ineligible claims. Quarterly payments on such claims may ultimately lead to difficulties for the Commonwealth in reclaiming payments that were made without reasonable justification – a risk to the integrity of the incentive also noted by the Review and which could only be accommodated by restricting quarterly payments to companies with good tax records.
4.4.3 The Review found that such a requirement would mean that many of the companies that might benefit the most from quarterly payments would be ineligible to receive them. Further, administrative agency costs would rise as a result of having to effect four quarterly payments instead of one annual disbursement.
– TCF proudly submits their recommendations for the R&D Tax Incentive review –
- Scope your potential to claim various grant programs
- Assist with the preparation and lodgement of grant applications
- Review or provide a health check on your internally prepared grant applications
- Establish record-keeping practices as required under various grant programs
- Provide prepayment loans against future cash refunds under the R&D Tax Incentive
- Keeping industry informed on all new Government policy and grant initiatives
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