Government industry assistance available NOW >> Govt. Grants | R&D Tax Incentive | Federal and State Stimulus Packages

TCF NEWSLETTER | 24.03.2020

R&D Tax Incentive

Government industry assistance available NOW

Trying to navigate your business through the ongoing threat of the coronavirus whilst maintaining the security of your staff and clients will no doubt be a juggling act we will all have to manoeuvre for some time.  As such, industry assistance from both Federal and State Governments has never been more crucial, but don’t just look at current cash flow assistance stemming from the economic response to the virus as other business grants and tax incentives are also available and can make an enormous difference to your ongoing viability.

Listed below, are a few current grant opportunities that may be worth considering as well as a Federal and State by State rundown on the cash flow assistance stemming from the coronavirus, be sure you don’t miss out!

Manufacturing Modernisation Fund:

A $50m Federal Government grant program which supports manufacturers to modernise, adopt new technologies, become more productive and create more jobs by co-funding capital investment and ups-killing your staff.

·        $20m will be allocated for small grants ($50,000 to $100,000) to support technology and efficiency improvements. Co-funding is on a 50/50% basis.

·        $30m will be allocated for larger grants ( $100,000 to $1m) to support transformative investments in technologies and processes. Successful claimants will be provided with grants equal to 25% of projects costs with the 75% balance funded by the claimant.

Round 1 – Successful applicants will be announced by the end of March

Round 2 – Applications are expected to open in early April with a end of May lodgement deadline.

R&D Tax Incentive:

It has been reported that over 800,000 SME’s in Australia had a payment plan with the ATO even before the virus hit. Despite negative press over the past 3 years concerning the behaviour of the scheme administrators in conducting heavy audit tactics to either reclaim or reduce benefits paid out, the recent Ombudsman’s report has now quelled this behaviour and claimants can now feel more secure in proceeding with making sound claims. As the benefit is delivered in the form of either cash refund or a tax offset to be netted off taxes owed, it’s a tremendous cash flow boost. As such we encourage all potential claimants to make claims without the fear of audit risk taking up your time and efforts to survive. The cut-off date for end June 2019 financial year claims is normally 10 months after the year end being the end of April 2020 but AusIndustry today extended the deadline to end September 2020, I would suggest you don’t wait, if your business is on hold and your looking for ways to survive, this is a great time to work with an R&D tax agent to pull your current 18/19 and 19/20 claims together. 19/20 financial claims can also be lodged from 1st July onward. All R&D companies should consider fast-tracking your claim preparation and contemporaneous record keeping requirements to ensure compliant claims.

Export Market Development grants:

This program has been under-funded for many years resulting in a modulated grant being paid to recipients of less than 50% of what they were entitled to. When the GFC occurred in 2007 the then Labor Government decided to pay out 100% of all claims as part of their stimulus package to assist industry. This very same initiative is now being lobbied for by exporters and may form part of the next tranche of announcements made to further assist industry. You heard it here first. If your business is on hold you may wish to consider preparing your documentation to claim from the 1st July as the earlier lodgements are made the quicker you will get paid.

Federal Government stimulus package

The Government yesterday released a second, far reaching $66bn stimulus package that boosts income support payments, introduces targeted changes to the superannuation rules, provides cash flow support of up to $100,000 for small business employers, and relaxes corporate insolvency laws.

The stimulus measures are not yet legislated, however, parliament reconvenes today, and it is expected that these measures will be legislated quickly.

The Prime Minister has warned that there are no “quick solutions” and that business should prepare for 6 months of disruption.

 What does this means for Small Business?

·        Tax-free payments up to $100,000 for small business and not-for-profit employers. An increase in the previously announced initial tax-free payments for employers to a maximum of $50,000. In addition to this, a second round of payments will be made up to a maximum of $50,000, accessible from July 2020.

·        Solvency safety net – temporary 6 month increase to the threshold at which creditors can issue a statutory demand on a company from $2,000 to $20,000, and an increase in the time companies have to respond from 21 days to 6 months. Directors also are provided with temporary relief from personal liability for trading while insolvent for 6 months.

·        Access to working capital – Introduction of a Coronavirus SME guarantee scheme protecting financial institutions by guaranteeing 50% of new loans to SMEs.

·        Sole traders and self-employed eligible for Jobseeker payment – the eligibility criteria to access income support relaxed for the self-employed and sole traders.

·        Temporary relief from some Corporations Act requirements

What does this means for Individuals?

·        Early release of superannuation – individuals in financial distress able to access up to $10,000 of their superannuation in 2019-20, and a further $10,000 in 2020-21. The withdrawals will be tax-free and will not affect Centre-                   link or Veterans’ Affairs payments.

·        Temporary reduction in minimum superannuation draw down rates – superannuation minimum draw-down requirements for account based pensions and similar products reduced by 50% in 2019-20 and 2020-21.

·        Deeming rates reduced – from 1 May, superannuation deeming rates reduced further to a lower rate of 0.25% and upper rate of 2.25%.

·        Supplements increased, access extended and eased – for 6 months from 27 April 2020:

·        A temporary coronavirus supplement of $550 will be paid to existing income support recipients (people will receive their normal payment plus $550 each fortnight for 6 months).

·        A second one-off stimulus payment of $750 will be paid automatically from 13 June 2020 to certain income support recipients (in addition to the payment made from 31 March 2020).

·        Eligibility for access to income support eased to include sole traders and the self-employed, and to those caring for someone infected or in isolation.

·        Waiting periods and assets tests temporarily waived.

·        Bankruptcy safety net – temporary 6 month increase to the threshold for the minimum amount of debt required for a creditor to initiate bankruptcy proceedings against a debtor from $5,000 to $20,000.

The Government has flagged that additional stimulus packages will be required, and we include below the detail in relation to each announcement.

Tax-free payments up to $100,000 for employers

·        From: 28 April 2020

·        Eligibility: Small and medium business entity employers and not-for-profit entities, with an aggregated annual turnover under $50 million.

The Government has increased the previously announced measures to provide cash flow support to business.

Now, eligible businesses with a turnover of less than $50 million will initially be able to access tax-free cash flow support, with the minimum amount being increased to $10,000 and the maximum amount increased to $50,000 (previously $2,000 to $25,000). However, additional support will be provided in the July – October 2020 period so that eligible entities will receive total minimum support of $20,000 and up to $100,000.

In order for a business to qualify for this support it must have been established prior to 12 March 2020. The rules are more flexible for charities because the Government recognises that new charities might be established in response to the pandemic.

The cash flow support measures will be provided in the form of a credit in the activity statement system. The support will be provided in two phases.
·        The first phase ensures that eligible employers receive a credit equal to 100% of the PAYG amounts withheld from salary and wages paid to employees during the relevant period, up to the maximum amount of $50,000.

·        The second phase ensures that eligible employers receive another series of credits, equal to the credits that were received under the first phase. For example, if a business received $40,000 of credits in the first phase it will receive a further $40,000 of credits in the second phase. These additional credits will be spread over two or four activity statement periods, depending on whether the employer lodges on a quarterly or monthly basis.

If a business pays salary and wages to employees but is not required to withhold any tax then a minimum payment of $10,000 will be made in the first phase and a further payment of $10,000 will be made in the second phase.

The credits are automatically calculated by the ATO and employers will need to lodge an activity statement to trigger the entitlement. If the credit puts the business in a refund position the excess amount will be refunded by the ATO within 14 days.

Businesses that lodge activity statements on a quarterly basis will be eligible to receive credits in the first phase for the quarters ending March 2020 and June 2020. Credits in the second phase will be available for the quarters ending June 2020 and September 2020. The minimum $10,000 payment will be applied to the first lodgement.

Business that lodge on a monthly basis will be eligible for the credits in the first phase for the March 2020, April 2020, May 2020 and June 2020 lodgements. Credits in the second phase will be available for the June 2020, July 2020, August 2020 and September lodgements. The minimum $10,000 payment will be applied to the first lodgement.

Eligibility for the measure will be based on prior year turnover. We will have to wait for the legislation for the finer details.

Not-for-profit employers, including charities, with an aggregated turnover under $50 million will also be able to access the cash flow support.

·        See: Cash flow assistance for businesses

Solvency safety net

A safety net has been put in place to protect businesses in temporary financial distress as a result of the pandemic by lessening the threat of actions that could unnecessarily push them into insolvency and force the winding up of the business. These include:

·        A temporary 6 month increase to the threshold at which creditors can issue a statutory demand on a company from $2,000 to $20,000.

·        The time a company has to respond to statutory demands will increase from 21 days to 6 months.

·        For 6 months, directors will be provided with temporary relief from personal liability for trading while insolvent.

·        See also bankruptcy safety net below

It will be more important than ever for business to stay on top of their debtors.

Debts incurred will still be payable by the business. Only those debts incurred in the ordinary course of the business will be subject to the safety net measures.

·        See: Temporary relief for financially distressed businesses

Access to working capital for SMEs – supporting lenders

The Government has announced a Coronavirus SME guarantee scheme that will guarantee 50% of new loans to SMEs up to $20 billion. These loans are new short-term unsecured loans to SMEs.

SMEs with a turnover of up to $50 million will be eligible to receive these loans.

The Government will provide eligible lenders with a guarantee for loans with the following terms:

·        Maximum total size of loans of $250,000 per borrower.

·        The loans will be up to three years, with an initial six month repayment holiday.

·        The loans will be in the form of unsecured finance, meaning that borrowers will not have to provide an asset as security for the loan.

Loans will be subject to lenders’ credit assessment processes with the expectation that lenders will look
through the cycle to sensibly take into account the uncertainty of the current economic conditions.

This latest measure builds on the previous initiatives to ensure small business can access capital, including:

·        An exemption to the responsible lending obligations to enable financial institutions to provide new credit, credit limit increases, and credit variations and restructures,

·        $15bn to the Australian Office of Financial Management to invest in wholesale funding markets used by small banks and non-banks to enable these lenders to support SMEs, and

·        Australian Banking Association members will defer loan repayments for 6 months for small businesses (affected small businesses will need to apply for relief).

Jobseeker payment’s

The eligibility criteria to access income support payments will be relaxed to enable the self-employed and sole traders whose income has been reduced, to access support.

More:

·        Income support for individuals

·        More financial support for coronavirus affected job seekers

Temporary relief from Corporations Act requirements

The Treasurer has been given a temporary instrument-making power to amend the Corporations Act to provide relief or modifications to specific compliance obligations.

ASIC has announced measures for those companies with a 31 December financial year that need to hold their AGMs by 31 May 2020, providing a two month no action period and enabling hybrid virtual AGMs.

Early release of superannuation

From mid-April, individuals in financial distress will be able to access up to $10,000 of their superannuation in 2019-20, and a further $10,000 in 2020-21. The withdrawals will be tax free and will not affect Centrelink or Veterans’ Affairs payments.

To be eligible to access your superannuation you need to meet the following requirements:

·        you are unemployed; or

·        you are eligible to receive a job seeker payment, youth allowance for jobseekers, parenting payment (which includes the single and partnered payments), special benefit or farm household allowance; or

·        on or after 1 January 2020:

·        you were made redundant; or

·        your working hours were reduced by 20% or more; or

·        if you are a sole trader — your business was suspended or there was a reduction in your turnover of 20% or more.

For those eligible to access their superannuation, you can apply directly to the ATO through the myGov website from mid-April.

More:

·        Early access to superannuation

Time limited fortnightly $550 ‘coronavirus supplement’

For the next 6 months, the Government is introducing a new Coronavirus supplement to be paid at a rate of $550 per fortnight. This supplement will be paid to both existing and new recipients in the eligible payment categories.

The payment will be made to those receiving:

·        Job-seeker payment (and those transitioning to the job-seeker payment)

·        Youth allowance job-seeker

·        Parenting payment

·        Farm household allowance

·        Special benefits recipients

In addition, eligibility to income support payments will be expanded to:

·        Permanent employees who are stood down or lose their job

·        Casual workers

·        Sole traders

·        The self-employed

·        Contract workers who meet the income test

The Government notes that these criteria could include those required to care for someone affected by the Coronavirus.

Asset testing has also been reduced and will be waived for 6 months. Income testing will still apply.

The payment is not available if you have access to any employer entitlements such as annual or sick leave or income protection insurance.

More:

·        Income support for individuals

Second $750 payment to households

The Government is now providing two separate $750 payments to social security, veteran and other income support recipients and eligible concession card holders residing in Australia (see the full list here). The payment will be exempt from taxation and will not count as income for the purposes of Social Security, Farm Household Allowance and Veteran payments.
·        Payment 1 from 31 March 2020 (previously announced on 12 March): Available to people who are eligible payment recipients and concession card holders at any time between 12 March 2020 to 13 April 2020;

·        Payment 2 from 13 July 2020: Available to people who are eligible payment recipients and concession card holders on 10 July 2020.

The payments will be made automatically to those that meet the criteria.

More:
Payments to support households

Bankruptcy safety net

A temporary 6 month increase to the threshold for the minimum amount of debt required for a creditor to initiate bankruptcy proceedings against a debtor will increase from $5,000 to $20,000. In addition, the time a debtor has to respond to a bankruptcy notice will be temporarily increased from 21 days to six months.

Where someone declares their intention to enter voluntary bankruptcy, the period of protection from unsecured creditors will be extended from 21 days to 6 months.

More:

Temporary relief for financially distressed businesses

State by State rundown of stimulus packages 

NSW:

·        The waiver of payroll tax for businesses with payrolls of up to $10 million for three months (the rest of 2019-20). This means these businesses will save a quarter of their annual payroll tax bill in 2019-20

·        $56 million to bring forward the next round of payroll tax cuts by raising the threshold limit to $1 million in 2020-21

·        $80 million to waive a range of fees and charges for small businesses including bars, cafes, restaurants and tradies

VIC:

·        $550 million which would go to 24,000 small and medium-sized enterprises with a payroll of less than $3 million as a payroll tax refund.

·        $500 million  into a fund for hardship payments, small grants and tailored support which would be distributed in consultation with the Victorian Chamber of Commerce and Industry, the Australian Hotels Association, the Australian Industry Group and other industry representatives.This money will go towards sectors that “really are doing it tough” who may not pay payroll tax and require more tailored support to survive.

·        $600 million, included a range of measures such as the waiving of 12,5000 venues’ liquor licence fees due this month and worth a total of $30 million

·        2020 land tax deferred for people that have at least one non-residential property and total taxable landholdings below $1 million.

·        2020 renewable liquor licence fees waived.

QLD:

·        $500m loan facility to  assist QLD business to retain staff.  Loans will be offered at a low interest rate of up to $250K over 10 years. The first year will be interest free.

SA:

·        $350 million stimulus package

·        Stimulus provides up to $100,000 to eligible small and medium sized businesses, and not-for-profits (including charities) that employ people, with a minimum payment of $20,000.

·        The Coronavirus SME Guarantee Scheme will support small and medium enterprises (SMEs) to get access to working capital to help get them through the impact of COVID-19.

·        Increasing the threshold at which creditors can issue a statutory demand on a company and the time companies have to respond to statutory demands they receive.

·        The Government is increasing the instant asset write-off threshold from $30,000 to $150,000 and expanding access to include businesses with aggregated annual turnover of less than $500 million (up from $50 million) until 30 June 2020.

WA:

·        $114 million in measures to support Western Australian small and medium businesses.

·        Payroll tax paying businesses with a payroll between $1 million and $4 million will receive a one-off grant of $17,500

·        $1 million payroll tax threshold brought forward by six months to July 1, 2020

·        Small and medium sized businesses affected by COVID-19 can now apply to defer payment of their 2019-20 payroll tax until July 21, 2020

More Federal and State stimulus package announcements will be made over the next coming days and weeks.

Call Gerry Frittmann on 0413 647 664  or email gerry@tcf.net.au

The 30th April R&D Tax incentive lodgement deadline looms fast and why good record keeping is paramount.

TCF NEWSLETTER | 12.03.2020

R&D Tax Incentive

Please be reminded that if you have not already prepared and lodged your 2018/19 R&D “registration of R&D activities” application with AusIndustry, it is important to note that the 30th April lodgement deadline is looming fast for companies with a standard 30th June reporting year end.

It is also important to note that the R&D Tax Incentive is a self-assessment program requiring claimants to keep contemporaneous records that track the progress of their R&D activities and quantifies the costs associated with the activities being claimed. If you don’t have the records to substantiate your claim you are running a risk so it’s important that this is reviewed and established now.

Simple things like:

  • populating an annual R&D project plan,
  • writing monthly technical reports,
  • taking photos evidencing stages of prototype work and
  • completing weekly time-sheets for R&D staff

is paramount in maintaining your successful participation on the program as well as good business practice as it establishes and values your greatest asset; your IP.

Don’t get caught out!

Here are a few reasons why claims can be rejected after review or audit:

Poor and/or insufficient R&D record keeping – Records must be contemporaneous; projects must be broken down and tracked by activities (core, supporting and ineligible); Weekly time-sheets are required to confirm the percentage of time /salary to be claimed by R&D staff that relate to eligible R&D activities; Technical reports should be written regularly that evaluate the results of the experiments including knowledge gap evidence to prove the knowledge is not already in the public domain; evidence that the R&D manager or CTO is a competent professional in the field and not playing industry catch up or learning a new technique.

Whole of project claim approach – claiming the total costs of running the business whilst it’s in start-up phase with no revenue on the basis that it’s all risky and contingent on the success of the business.

Claiming business model innovation in absence of high levels of technical or scientific risk – just because the new business model disrupts the old and uses technology to do so does not constitute eligible R&D under the program.

Claiming unpaid associated party fees – if an entity or person is associated in any way with the R&D entity the fees for R&D services must be paid by the 30th June in the year of the activity to allow the benefit to be claimed and paid. Otherwise it must be carried over in the tax return until the payment is made, after which the benefit can be claimed in later years.

Claiming late superannuation payments – Claiming superannuation on R&D staff where the super was not paid on time or before the end of the financial year. Generally, compulsory superannuation payments paid late (outside the time limits) can’t be claimed as a business deduction, which also means that any late quarterly super payments relating to eligible R&D staff may not be eligible to be claimed under the R&D Tax Incentive. If the financial year’s last quarter’s super is not paid by 30 June (ie, acknowledged by the complying superfund as received by 30 June), then that contribution cannot be claimed as a deduction in that year and must be claimed in the following year – don’t get caught out.

If you require assistance with your 18/19 claim preparation or establishment of compliant record keeping for your 19/20 R&D activities or if you would like to discuss these matters further please contact Gerry Frittmann – Managing Director at TCF Services on gerry@tcf.net.au or contact your R&D Tax consultant at TCF Services.

Gerry Frittmann

Managing Director

Tax agents registration number 39849006

P: 02 8219 4900

The 30th April R&D Tax incentive lodgement deadline looms fast and why good record keeping is paramount  

TCF NEWSLETTER | 12.03.2020
R&D Tax Incentive

The 30th April R&D Tax incentive lodgement deadline looms fast and why good record keeping is paramount.

Please be reminded that if you have not already prepared and lodged your 2018/19 R&D “registration of R&D activities” application with AusIndustry, it is important to note that the 30th April lodgement deadline is looming fast for companies with a standard 30th June reporting year end.

It is also important to note that the R&D Tax Incentive is a self-assessment program requiring claimants to keep contemporaneous records that track the progress of their R&D activities and quantifies the costs associated with the activities being claimed. If you don’t have the records to substantiate your claim you are running a risk so it’s important that this is reviewed and established now.

Simple things like:

  • populating an annual R&D project plan,
  • writing monthly technical reports,
  • taking photos evidencing stages of prototype work and
  • completing weekly time-sheets for R&D staff

is paramount in maintaining your successful participation on the program as well as good business practice as it establishes and values your greatest asset; your IP.

Don’t get caught out!

Here are a few reasons why claims can be rejected after review or audit:

Poor and/or insufficient R&D record keeping – Records must be contemporaneous; projects must be broken down and tracked by activities (core, supporting and ineligible); Weekly time-sheets are required to confirm the percentage of time /salary to be claimed by R&D staff that relate to eligible R&D activities; Technical reports should be written regularly that evaluate the results of the experiments including knowledge gap evidence to prove the knowledge is not already in the public domain; evidence that the R&D manager or CTO is a competent professional in the field and not playing industry catch up or learning a new technique.

Whole of project claim approach – claiming the total costs of running the business whilst it’s in start-up phase with no revenue on the basis that it’s all risky and contingent on the success of the business.

Claiming business model innovation in absence of high levels of technical or scientific risk – just because the new business model disrupts the old and uses technology to do so does not constitute eligible R&D under the program.

Claiming unpaid associated party fees – if an entity or person is associated in any way with the R&D entity the fees for R&D services must be paid by the 30th June in the year of the activity to allow the benefit to be claimed and paid. Otherwise it must be carried over in the tax return until the payment is made, after which the benefit can be claimed in later years.

Claiming late superannuation payments – Claiming superannuation on R&D staff where the super was not paid on time or before the end of the financial year. Generally, compulsory superannuation payments paid late (outside the time limits) can’t be claimed as a business deduction, which also means that any late quarterly super payments relating to eligible R&D staff may not be eligible to be claimed under the R&D Tax Incentive. If the financial year’s last quarter’s super is not paid by 30 June (ie, acknowledged by the complying superfund as received by 30 June), then that contribution cannot be claimed as a deduction in that year and must be claimed in the following year – don’t get caught out.

If you require assistance with your 18/19 claim preparation or establishment of compliant record keeping for your 19/20 R&D activities or if you would like to discuss these matters further please contact Gerry Frittmann – Managing Director at TCF Services on gerry@tcf.net.au or contact your R&D Tax consultant at TCF Services.

Gerry Frittmann

Managing Director

Tax agents registration number 39849006

P: 02 8219 4900

How the government can help start-ups

Written by Adir Shiffman – executive chairman of Catapult Sports and a serial investor and entrepreneur.

Financial Review Article 18/02/2020

As we enter the 2020s the federal government finds itself unwittingly wielding the power to trigger a mass extinction event across the ecosystem of early-stage Australian start-ups.

Recently I was asked to nominate a key ingredient without which a startup is unlikely to succeed. My answer: cash in the bank.

Cash is the oxygen of every business, but for early stage pre-revenue startups it is something more akin to the artificial respirator in ICU. When I launched my first start-up in the mid-90s there was little funding beyond the few coins I gratefully accepted from wealthy people. There was only one reliable funding source for early stage start-ups at that time and astonishingly it came via the Australian Taxation Office (ATO). Through various names and incarnations this was always the R&D tax incentive.

Twenty-five years later, this incentive is still vitally important and every start-up I know has relied upon it at some point for survival. In the facilitation of an industry and the creation of mass employment, it is a singular factor to which one can attribute a transformative contribution.

But the government no longer believes the cost is so little and desires to cut spending by $1.8 billion over four years. While not all of this will come from early stage start-ups, it risks eradicating a significant portion of the current ecosystem and retarding the development of the next crop of startups. Problematically, the government has a good point that the system has been misused by some, and is a clearly flawed program. It lacks the requisite black-letter law clarity, and while it is easy to hate the ATO, it is forced to walk a discretionary tight rope and has historically performed admirably.

The translucence of these rules also spawned an entire industry of consultants, some great, some shysters, most in-between, but with some double-digit percentage of all payments eventually flowing there.

From a government perspective this represents a juicy ‘‘efficiency dividend’’.

It is a problem that,in the scheme, pre revenue start-ups are cast into the same murky pool as companies generating nine-digit revenue and even global tech giants undertaking local R&D.

At the same time the government is cutting the total program cost, its proposal includes a rise in the cap on refundable R&D by the largest enterprises, to $150 million from $100 million. The biggest problems, though, relate to an outdated ideology, disconnected from the dynamics of today’s industry. Most of the world’s start-ups develop software, yet the R&D rules are most unclear when it comes to the degree of applicability of software development programs.

In part this can be attributed to confusion with the fundamental concept of ‘‘research’’ and the misunderstood role of ‘‘development’’. For most start-ups building a new software application, research and development are inextricably intertwined. For example, large portions of the code written for a new application type (or a significant advance) are simultaneously both R and D. As we enter a new decade the historical distinction between research and development is frequently academic and the dividing line often blurred. The good news is that specific, targeted improvements can enhance the existing life-giving benefits of the R&D program while improving efficiency.

There are five obvious changes required:

1. Create three separate categories dividing pre-$20m revenue start-ups, larger Aussie tech companies, and overseas enterprises conducting local R&D.

2. Broaden the definition of research, and include software development.

3. Provide the ATO with crystal clear applicability guidelines.

4. Greatly simplify the calculation and submission process so that little outside help is needed, an online process pulling data from accounting packages would be best.

5. Establish an independent ombudsman with the power to quickly arbitrate any disputes.

If the Treasurer still believes he must reduce overall program expenditure as part of a broader budget objective then at least the above framework enables precise targeting rather than an approach bound to deliver unintended consequences.

It has the power to either create an even better next generation of startups, or to destroy much of what has already been built, so it will be a terrible shame if the legacy of this government is the blood of start-ups on its hands.

Adir Shiffman is executive chairman of Catapult Sports and a serial investor and entrepreneur.

Review of the R&D Tax Incentive – A redacted version of the key findings and recommendations

REVIEW OF THE R&D TAX INCENTIVE

TCF Services would like to congratulate Ms Kate Carnell AO (who lead the review into the administration of the R&D Tax Incentive) in her role as the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) for precisely laying bare the many issues which have left the R&D Tax Incentive in an uncertain state over the past 3 years. The level of detail in this report demonstrates how Ms Carnell and her office have listened and understood the many issues put forward by the stakeholders interviewed. All in all, it is a very positive and realistic report. It should be noted that the legislation under which the Ombudsman was acting, limited the review to Small Business with an annual turnover of $5m or less. However, her observations are equally applicable to claimants under the scheme with turnovers > $5 million. It will be interesting to see if the scheme administrators now take up the recommendation of “redressing the claimants” that were wrongly subjected to heavy audit activity with demands to pay back 4-5 years of receipts OR whether its too late as they have all been forced into administration or have lost the business impetus as an outcome of the process. Likewise, the Government is not giving up on re-introducing legislation to further reduce benefits under the program despite the fact the Senate committee lead by their own party members rejected the very same amendments a year ago. Talk about uncertainty….   

The full 50 page “Review of the R&D Tax Incentive” report can be found here 

Likewise, if you would like to review the newly re-introduced Bill seeking to reduce benefits under the program it can be found here

A redacted version of the key findings and recommendations are noted below:

Executive Summary (pg.4)

My office is recommending that this important incentive be retained, and a suite of reforms are made to the way the system is administered.

This report details how small and family business taxpayers have been subjected to review, examination and audit by the 2 agencies responsible for the delivery of the program. In all cases, this compliance activity was retrospective and commenced several years after the relevant research and development (R&D) activity was undertaken and the R&DTI refund received. In almost all cases, the R&DTI claims were rejected in total. This has had a devastating impact on the companies, with some saying they face financial ruin. Others have scaled down their R&D efforts in Australia and reduced their R&D staff.

It is therefore critical that wherever possible the program is improved for small and family businesses and that R&DTI risk and compliance activities are conducted as close as possible to when “they” register their R&D activities and before they claim the benefit with the ATO.

We identified an overall shift in the way the R&DTI legislation has been interpreted over the last three to four years; a narrowing of focus leading to a rejection of claims, which in previous years has been regarded as low risk.

There appears to have been a broad-brush approach to program integrity with a view to recouping Government expenditure on the R&DTI. Valid claimants have been swept up along with those who have been badly advised by unscrupulous R&D “consultants”

The ATO and AusIndustry tell us that they are revising their approach to R&DTI compliance, which we welcome. It is also critical that there is a mechanism by which those businesses adversely affected by past poor processes can seek redress. 

Recommendations (pg.5)

We have grave concerns that the administration of the program does not provide sufficient certainty for small business and that compliance activity by the regulators can and does negatively impact the continued viability of small businesses. The potentially devastating impact on the business is primarily due to audit activity coming years after an incentive has been invested back into business – with many having relied on expert professional advice. Small businesses simply do not have the cash-flow or retained earnings to repay the R&DTI together with accumulated interest and penalties.

The program requires a fairer, more consistent, educative and customer-focused approach by both AusIndustry and the ATO embedded consistently throughout both networks. Our recommendations are based on the importance of the characteristics of good governance including transparency, clarity and certainty to ensure that companies are encouraged to undertake R&D activities and claim the R&DTI. The recommendations have the following 4 themes: 

·       Where compliance examinations / audits are necessary, they should take place as close as possible to the first year of registration of a project and should not be retrospective beyond one year

·       Guidance materials needs to be comprehensive, clearer and up-to-date and developed in consultation with small business.

·       Substantiation and record-keeping requirements should reflect commercial practicality with regulator personnel fully equipped to understand and collaborate with small business

·       Small business must be assisted to help identify and retain professional and responsible R&D consultants.

The recommendations are:

1.     ATO and AusIndustry administration of the R&DTI should be seamlessly integrated.

2.     Clear joint ATO and AusIndustry guidance must be provided and maintained

3.     The approach to compliance should be: (pg.6)

Proactive – assisting a company to comply in the first year of registration of a project

Professional – ensure staff reviewing/auditing/examining companies are properly trained and experienced in both the technical aspects of the legislation and how to apply it to industry sectors (particularly when R&D is underpinned by software using Agile and Rapid development methods).

Collaborative – AusIndustry’s statutory examination process should include as standard a meeting with the company to allow it to explain the registered activities and work through the company’s records.

Proportionate – Both ATO’s and AusIndustry’s requirements for supporting evidence should be proportionate to the size and complexity of the business and the amount of the claim

Advisors should be skilled and responsible for their advice:

Like the company tax return that includes a declaration by the tax agent, the R&DTI schedule should include a declaration by the R&DTI adviser.

Registered tax agents who prepare or lodge R&DTI claims should meet specialised further education criteria that demonstrates understanding of the requirements of the R&DTI.

Additional Continuing Professional Education (CPE) opportunities through structured courses should be provided by the ATO and AusIndustry to support registered R&D consultants achieve their CPE requirements.

Program Governance (pg.10)

The agencies should engage with small business in the same way and within the same time-frame that they expect of small business.

Changes to R&DTI Compliance Approaches by AusIndustry and the ATO

Both AusIndustry and the ATO in the second meeting, in October 2019, and in subsequent correspondence have advised that they have changed their practices in relation to R&DTI compliance

Under AusIndustry’s new Integrity Framework, each company (R&D entity) will be grouped in particular risk categories:

·       Those “getting it right” are in a lower risk and support when required

·       Those that “are trying to get it right” are medium risk with targeted education and advice 

·       R&D entities “who do not comply” are considered higher risk would be receive correspondence and meet with AusIndustry to discuss eligibility issues – the company may withdraw their application or AusIndustry may commence a statutory assessment…. after which AusIndustry can either discontinue if evidence is provided by the company. A review process is also available if activities are still found to be ineligible.

AusIndustry has released a Service Commitment outlining the level of service their customers can expect. In addition, AusIndustry has told ASBFEO that they will undertake training for staff in stakeholder management and customer experience.

Value of the Program (pg.12)

Claimants increased from 6,475 in 2013 to 13,156 in 2017-18.

A reduction of $700 million (or 13 per cent) in tax offsets paid in 2017-18 from the previous 2016-17 year despite a small increase in the number of claimants.

This reduction in tax offsets paid could be attributed to increased compliance activities, clawing back prior year claims.

Of particular note is that software claims on the program have increased (Software R&D expenditure represents 25-30 per cent to total claimed expenditure) and that SME expenditure claims on the program have increased significantly. Approximately one third of the 13,000 companies registered for the R&DTI are undertaking software development. The other companies are in a wide range of industry sectors.

Approach / Methodology (pg.14)

ASBFEO has investigated the effect of the R&DTI legislation, policies and practices on small businesses or family enterprises as a result of a number of companies approaching ASBFEO about the treatment and outcomes of their R&DTI audit/examinations by the ATO and AusIndustry. They reported that the interpretation of the legislation by AusIndustry and the ATO regarding the eligibility and substantiation of software R&D claims, has shifted to become more rigid. Companies that are not software related, raised concerns with ASBFEO where the ATO had retrospectively ruled that their R&D Incentive activities were not eligible R&D even though AusIndustry advised they were.

In undertaking its investigation the ASBFEO:  

1.      Examined how small businesses typically use the R&DTI;

2.      Determined if there had been a change in what activities were considered eligible by AusIndustry and the ATO pre and post the 2019 software guidance material published by AusIndustry and how this had been conveyed to small businesses.

3.      Determined the impact on a small business of the ATO and AusIndustry being able to audit/examine R&DTI claims going back four years.

4.      Identified the circumstances in the legislation where the ATO can decide that the registered activities are not eligible activities.

5.      Examined the liability a R&D consultant incurs where the ATO and/or AusIndustry has audited/examined their client’s R&DTI claim, ruled the claim ineligible and ordered the benefit be paid back to the ATO.

ASBFEO interviewed and received communications regarding over 20 small business R&DTI claimants who had been reviewed/audited/examined by the ATO and AusIndustry to understand the agencies process and the impact they had on the businesses, with a ‘deep dive’ into eight of these companiesASBFEO examined the ATO and AusIndustry correspondence/decisions/position papers from the agencies to these companies (pg. 15)

Six small and medium R&D consultants were interviewed, as well as with eight R&D consultants from major firms.

Summary of Findings (pg.16)

·       Overall, the program is exceedingly complex.

·       The operation of the ATO and AusIndustry are not properly integrated.

·       The ATO and AusIndustry have critical roles to play in providing further clarity of operation and administration of the law.

·       The ATO and AusIndustry guidance material is fractured and incomplete.

·       Compliance activities have been reactive, lack the commercial understanding of how small businesses operate, assume guilt, are resource intensive and result in long lag times for decision making so that the viability of the scrutinised business is threatened.

·       Many companies are scaling down their R&D efforts in Australia and have reduced their R&D staff due to experience with both agencies compliance activities and the uncertainty surrounding eligibility and the substantiation of the R&D and its expenditures.

·       The program complexity and issues with the administration of the program results in the R&D advisor role being critical to the company. While the R&D consultants we spoke to operate professionally, there are those who are incentivised to increase claims and are not held responsible for their advice. Unscrupulous operators are able to continue to advise businesses for long periods of time.

The Retrospective Nature of Program (pg.17)

AusIndustry has the ability to make a finding that is binding on the ATO for four retrospective years. Statutory examinations undertaken years after the R&D has been undertaken has created an uncertain environment for innovative companies undertaking R&D in Australia.

AusIndustry advise that R&D projects and activities can span across multiple years. Businesses are required to register their activities annually. As such, an examination being undertaken in one year on R&D activities for a project covering previous years may require examination of those earlier years, particularly, if the core activity was conducted in a previous year.

It is however unfair to adversely affect a company at such a late stage following the incentive payment, particularly when they had, for several years, self-assessed using the guidance material that was available at the time and which they believed they could rely upon. The majority of the companies spoken to had registered R&D activities which they genuinely believed were eligible, on the information provided to them by AusIndustry and the ATO. Many had reinvested the offset back into the business.

AusIndustry’s contention is that ‘the legislation has not changed’. There is evidence however that the current AusIndustry software guidance, in particular, has an effect of narrowing their interpretation of the legislation

Anecdotal evidence suggests that some companies are reporting their R&DTI estimated refund as a liability in their financial records, to recognise the potential of the company having to repay the funds accessed in previous years. This has an impact on possible investment into the company.

A finding about the eligibility or otherwise that is applied as close as possible to when the R&D is undertaken has the potential to be fairer to a company, especially for first time registrants.

AusIndustry has said that, in practice, this is difficult as a high percentage of registrations occur close to the 30 April cut-off date and it would be very resource intensive to reach a high number of those.

AusIndustry, will have additional resources to assist in their integrity functions early in 2020. A procurement process was advertised in early 2019 to engage a third party provider to assist with a range of R&DTI integrity functions. When questioned, AusIndustry said that this was as part of the reform measures to the R&DTI announced in the 2018-19 Budget, where the Government committed additional resources to support program integrity and administration.

All decision making will be retained by AusIndustry, however the contractor will assist with integrity activities and provide recommendations for review and decision. The expectation is that there will be a contract in place in late 2019 with activities commencing in early 2020. A significant proportion of these new resources should be directed to pre-registration examinations, particularly for first time registrants to ‘help to get it right’.

AusIndustry Integrity Measures (pg.17/18)

Although customer service/customer experience and compliance/integrity activities should not be mutually exclusive, we have received many complaints from companies about the fairness and transparency of the statutory examination process and the cultural mindset of AusIndustry assessors. These include:

1.      The summary of key issues in the statutory examination letter is a generic list and provides little specific information relating to the company’s registered activities (a copy of the letter is at Attachment D).

2.      The letter contains little guidance regarding the type and volume of contemporaneous documents that would meet the program requirements (a copy of letter is at Attachment D).

3.      AusIndustry has been very reluctant to meet with companies during the examination process. Evidence is required in writing and many companies are concerned about the correct interpretation of the documents.

4.      Long time-frames for AusIndustry to respond to the company and to make a decision during the statutory assessment process.

5.      We have been advised that there have been instances where the AusIndustry assessor’s attitude is that the registration is ineligible and it is up to the company to prove differently.

6.      We have been advised that an AusIndustry assessor often says ‘A Google search shows me that this existed [at the time of the project] and therefore the core R&D activities cannot be eligible’, thus trivialising the R&D effort and not recognising or acknowledging the fast moving nature of R&D in many sectors.

Both AusIndustry and the ATO appear to take a ‘one-size-fits-all’ approach to companies in examining and auditing the R&DTI registrations/claims. Their requirements do not differentiate between large and small companies – or the size of the offset.

AusIndustry Guidance Material (pg.19)

AusIndustry has issued a range of guidance material over the period of the program.

Incorrect interpretation of the legislation caused confusion for companies.

The Frascati Manual was not referenced in any AusIndustry or ATO’s guidance material released prior to February 2019.

The AusIndustry 2019 Software Guidance material refers to the Frascati Manual, however it makes selective use of the wording in the manual, which in effect, restricts the interpretation of the legislation.

AusIndustry’s responds to Frascati Manual by saying “The test for what is an R&D activity for the purposes of the R&DTI is not the same as the test for an R&D activity as set out in the Frascati Manual.”

“Software is developed in Agile teams, which try things and discard things, it doesn’t map well to the structure that the Frascati model tries to create.”Daniel Petre, Co-founder of Airtree Ventures, quoted in the AFR article of 3 December, 2018 ( pg. 20)

Panel members say no offer was made about revisiting the current guidance material.

The first Federal Court decision in relation to the eligibility of the R&D activities was made on 25 July 2019 in Moreton Resources Limited v Innovation and Science Australia [2019] FCAFC 120 and confirmed that the process of statutory interpretation must always lead back to the text of the legislation, regardless of the wording in any other extrinsic materials. This finding is critical, given the apparent over-reliance on other materials such as the Explanatory Memorandum in recent decisions by the AAT. An analysis of the Moreton Resources decision is at Attachment C. The matter has been sent back to the AAT for further consideration. AusIndustry has not provided further information regarding their ISA’s position going forward.

In summary, there are a number of issues with the new AusIndustry software guidance material which include:

1.     It is written in in a prescriptive way when referencing the principles in the Frascati definition

2.     Its focus is largely on why activities are not R&D with little focus why it would be R&D. for example there is no guidance on how software development using the Agile method can demonstrate that the development is, or includes, R&D activities; and

3.     When its quotes the Frascati manual it has made changes that affect how the definition of understood. (pg. 21)

ATO Integrity Measures (pg.22)

Throughout our consultations however, companies reported that the ATO staff involved in reviews and audits were aggressive in their interactions, exhibited poor client engagement skills, displayed a lack of respect and disregarded the taxpayer’s representation.

Lack of advice from the ATO about the type and volume of documents demonstrating nexus between R&D activities and notional expenses.

When challenged to outline the exact documentation needed, the ATO has been known to advise they cannot provide confirmation as they may give the wrong advice. 

Taxpayers are given strict time frames in which to produce documents or answer questionnaires.

there is no equivalent response time limit applicable to the ATO. Taxpayers are left to wait for months for a response and in cases we have seen, another request for information.

ATO Penalties (pg.23)

The ATO has ruled in some cases that a company did not demonstrate ‘reasonable care’ as the tax advice it received was not considered ‘independent’ because R&D consultant charged a commission based on the value of the tax offset (not a fee-for-service).

ATO Debt Recovery (pg.24)

The ATO continues debt recovery action while a debt is in dispute.

Interest should only be charged once all venues of objection are finalised.

ATO Ruling on Eligibility of R&D Activities

There is no legislative basis for the ATO to determine whether or not the activities are eligible under the legislation.

The Tax Practitioner’s Board (TPB) (pg.25)

Given the complexity of the legislation, the R&D consultant should be an expert in the legislative aspects of the program; however there is no guarantee that a tax agent with the R&D condition understands the rules of the R&DTI and has experience in assessing the validity of a company’s claim. There is also value in the R&D consultant understanding the broader tax landscape. (pg.26)

R&D Tax Consultants (pg.26)

We heard from R&DTI consultants that often client companies elect to pay a percentage of the tax incentive as a fee for the service so they have certainty of the cost and are not required to fund the expense from the current cash flows. (pg.27)

Attachment A – Brief Overview of R&D project methodology using Agile and Rapid (pg.28)

The development of new and improved software can and must be able to be considered R&D where this is appropriate.  The objective is to create new knowledge

The first section ( of the eligibility criteria) clearly states the purpose as including new knowledge in the form of new products, processes and services. The corollary of the exclusion in the second part is that developing, modifying or customising can be a core R&D activity if it is for a different dominant purpose.  This would include: 

Newly developed, modified or customised software for internal use by the R&D entity, a connected entity or affiliate that is for production or any other non-administration purpose, or any newly developed, modified or customised software that is created primarily for external users even if it is internal administration software.

This eligibility would be limited to the degree the development, modification or customisation includes, or is reliant on, the new knowledge created by the core R&D activities conducted for the R&D entity.

The R&D Tax Incentive is not a scientific research program. However, it does require that the experimental development activities needed (if any) to create, or enable the creation of new, modified or customised software for most purposes must be conducted in a scientific and verifiable way.

Application to Agile and Rapid based software development processes(pg.29)

A common error by R&D entities is that the creation of a new piece of software or a new function within an existing software product is R&D because it is a systematic progression of work to create a new or improved product.

Methodology Does Not Determine Eligibility (pg.30)

The experimental activity must be necessary because the outcome could not be determined in advance based on existing knowledge or experience. There needs to a more than insubstantial purpose to resolve uncertainty in outcomes in the conduct of the activity.

This uncertainty must be being resolved by answering the hypothesis in the systematic progression work. That is, the development cycle must be being applied to conduct the experiments and they must measure the outcomes so the R&D entity can determine the logical conclusion to the questions raised in the hypothesis.

How Agile and Rapid Can Demonstrate R&D Eligibility (pg.30,31)

The philosophy behind the development of modern software development processes is to optimise …. processes so they are a complete development management system, but the process does not get in the way of, or needless delay, the deployment of good and tested products. It has allowed the compression of the cycles of development to the extent that at the extreme the time between public release sprints can be weekly instead of the traditional once a year release or less. This has resulted in a sharp decline in the creation, and need for, systematic development documentation. The traditional stages of:

Set requirements → Design → Develop → Test → Maintain

are replaced by a process of many short sprints managed through Scrums or alike: 

* Grouped into User Stories that may be grouped at a higher level into Epics for larger or complex overall goals.

* The Backlog features are ranked and weighted in order of importance.

It would be up to the project manager to document the discussions of the obstacles and the development progress, performance and results.

If a software developer is following this process and documenting the critical uncertainties and their conclusion, then there is no reason to argue that the use of Agile means that the business is not able to demonstrate that the development was, or included, R&D activities within the systematic progression of work.

Summary (pg.32,33)

The use of Agile and equivalent methods can be an effective tool to manage R&D software development activities. So long as the ATO compliance reviews seek to merely readily verify the calculation of estimates, determinations and calculations, then these styles of methodologies should not prevent the R&D entity from providing documentation and the particulars showing the basis and method of these allocations between R&D and Non-R&D activities. This would meet the requirements of s 262A.

Equally, a review by AusIndustry should be approached from an understanding of how the R&D entity applies the Agile process. This would include a judgement of d whether the project manager and development team properly group backlog features into stories that separate the core,

supporting and non-R&D activities and how the conduct of development tasks, processes of managing progress and obstacles and determinations of results and conclusions demonstrates the R&D. They should not expect each ticket against each individual backlog feature to be individually demonstrable as an R&D experiment.

To focus on each individual development ticket and expect each invoice to individually demonstrate the eligibility of the activity and the nexus of the expenditure to that experiment is missing the point of seeking to encourage more businesses to do more R&D. It takes a business’ focus off the R&D to create documentation that is not required by the law and will fail to encourage businesses to better manage their new knowledge creation processes. It is not needed to readily verify what R&D a business did and whether it is reasonably calculated.

Attachment B (pg. 34)

The current R&D legislation and application of the 2015 Frascati Definition to R&D in the development of software.

The R&D legislation was passed into law in 2011.

The legislation enacted a very significant broadening of what is eligible R&D compared to the old definition.

The new definition needs to be considered as a whole and in how it applies to software development in a conceptual way. That is, it should be applied based on the principles it expresses and not as prescriptive list.

Case Study – the Company, the ATO and AusIndustry (pg.38)

Where the project is an entirely new application/system and it is prior to the creation of a Minimum Viable Product (MVP) then the majority of the project will likely be core R&D developments and the supporting setups, frameworks, libraries etc. It is possible that a small proportion of the activities will be neither core R&D experiments or supporting R&D tasks directly required to enable these experiments to be conducted. Typically, this will require a very high percentage of the development activities to be either core or supporting R&D activities

Where the project is an upgrade or improvement to an existing system

Typically, the Core and Supporting R&D activities will drop to around 30 per cent of the development, maintenance and support costs.


Examinations/Reviews by AusIndustry and the ATO (pg.38)

Once the company is selected for a review by AusIndustry or the ATO, the current processes will seek to exclude 100 per cent of the activities for the maximum time allowed (typically 4 years) as the starting point. This will be either because:

a.      AusIndustry has rejected the whole of the claim because it considers the claim to be the whole of the project. Examples have been given of cases where:

·   the claimant has already demonstrated that the claim is limited to only specific areas of improvement or new capabilities.

·   AusIndustry then seeks to exclude any experiments on aggregation, implementation or integration and then breaks down the functional improvements to such a granular level that the R&D is missed.

b.      The competent professional test is often misapplied:

·   would a competent professional consider the outcome should be possible

– instead it is applied as –

·   would a competent professional consider that the method to reach the outcome can be known in advance – so no experimental development activity is required.

c.      The ATO will reject the totality of the expenditure claim because the contract developer costs or the Jira time and task tracking data does not demonstrate the nexus between the expenditure and the activities they are for.

d.      The ATO will expect a level of documentation that is not available or reasonable to expect. This has seen a progressive ramp up in previously acceptable

documentation based on reasonable estimates and allocation methodologies based on previous guidance from the Commissioner of Taxation. Today there is an expectation that all businesses will have highly accurate and separately verifiable time-sheets (whilst admitting that the AAT has stated for internal employees time-sheets are not required) and overhead allocations based on counting emails and envelopes, rejecting invoices from suppliers that only contribute to R&D activities for not detailing the R&D activity and accurate calculations of percentages of office space excluding walkways and amenities.

e. The ATO will increasingly rely on its own determination of whether the R&D entity is conducting R&D unless an assessment has already been by a delegate of Innovation and Science Australia.

Attachment C – The implications of the Moreton Decision (pg.40)

The Tax Laws Amendment (Research and Development) Act 2011 sets out the object of the legislation and the definition of core activities. The legislation requires a test that relies on the uncertainty in outcomes that are only able to be determined by the conducting experimental activities. It also accepts that R&D includes the experimental development of new and improved materials, products, devices, processes or services. That is, it recognises that business enterprise expenditure on R&D (BERD) is about the development of new knowledge as defined and grouped in the Frascati definition as Pure and Basic Research, Applied Research and Experimental Development:

the systematic “Experimental development” work that draws on the experiments that developed the new knowledge and/or practical knowledge to produce new or improved materials, products, devices, processes, systems and services 38.

ISA errors in R&D Tests (pg.41)

It was found that there were two errors in the application of the tests to determine if the activities are R&D. The first is that it is incorrect to consider that the first line in s 355-25(1) of the legislation creates a distinction between experimental activities and other R&D development activities that meet the requirements in s 355-25(1)(a) and (b). This line is:

Core R&D activities

1)     Core R&D activities are experimental activities:

The Federal Court’s decision was to reject the ISA position that these two highlighted words create an additional test or requirement over:

a.      whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:

i.     is based on principles of established science; and

ii.     proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and

b.      that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).

That is, the term experimental activities are those that meet the tests in a. and b., not that eligible activities are a subset of activities that meet the tests in a. and b.

The second place that ISA was found to be incorrect is its application of whether the definition restricts R&D to excluding experimental development activities because they are seeking to apply current technologies. The R&D entity was seeking to generate energy from mine gases by using an existing gas turbine generator. Both mine gas power generation and generation using gas turbines are known technologies. However, the R&D entity identified clear and significant uncertainties requiring experiment development activities to use these technologies under the planned circumstances. The Federal Court agreed with the R&D entity that there was uncertainty in determining the outcome in advance of any experimentation on the basis of current knowledge, information or experience.

ISA errors in the purpose: (pg.41,42)

Purpose test by ISA since January 2017 has been to sharply reduce this to more of scientific research support program. This has often seen the rejection of R&D activities on the basis that they are project outcome focused, not knowledge research focused.

This reflects the progress of the development of the Bill in that its intent is to encourage R&D and not just research.

The errors identified in the case are very applicable to R&D in software development.

This is often the only purpose of different phases of development of software development. This would apply to the development of a completely new item of software up to the MVP (minimum viable product) for testing by alpha and beta testers. It would also apply to a project to create new functionality to an existing product or improve the operating processes of that product.

If you would like to discuss any aspects of the ASBFEO “Review of the R&D Tax Incentive” report with me or require assistance with your record keeping, claim preparation work or simply require a second opinion, please feel free to call on 02 8219 4900 or email gerry@tcf.net.au

Controversial R&D Tax changes reintroduced

CONTROVERSIAL R&D TAX  CHANGES REINTRODUCED  

The contentious changes announced in the 2018 May budget to reduce the benefits available under the R&D Tax Incentive have been re-introduced with only minor amendments despite having been rejected by members of both sides of Parliament in the prior Senate Economics committee hearings. The main message is that any changes will not affect the current 18/19 R&D claims being processed and if the changes are passed they will be introduced from the 19/20 financial year onward.

The table below provides a comparison of the key features between the new and current law.

Comparison of key features of new law and current law

 

The expenditure threshold

NEW LAW: The R&D expenditure threshold is increased to $150 million.

CURRENT LAW: The R&D expenditure threshold applies to eliminate the incentive component of the R&D tax offset in relation to notional deductions in excess of $100 million.

NEW LAW: The R&D expenditure threshold is a permanent feature of the law.

CURRENT LAW: The R&D expenditure threshold is legislated to cease on 1 July 2024.

NEW LAW: The R&D expenditure threshold is a permanent feature of the law.

CURRENT LAW: The R&D expenditure threshold is legislated to cease on 1 July 2024.

The R&D Tax Offset for small R&D entities

NEW LAW: R&D entities with aggregated turnover of less than $20 million are generally entitled to an R&D tax offset rate equal to their corporate tax rate plus a 13.5 per cent premium.

CURRENT LAW: R&D entities with aggregated turnover of less than $20 million are generally entitled to an R&D tax offset rate of 43.5 per cent.

NEW LAW: The amount of a refund that an R&D entity can receive is capped at $4 million per annum.

NEW LAW: Offset amounts that relate to expenditure on clinical trials do not count towards the cap and remain refundable.

CURRENT LAW: R&D entities with aggregated turnover of less than $20 million are entitled to a tax refund for any R&D tax offset they receive in excess of their income tax liabilities.

The R&D Tax Offset for companies over $20 million turnover

NEW LAW: R&D entities with aggregated turnover of $20 million or more are entitled to an R&D tax offset equal to their corporate tax rate plus a premium based on the level of their incremental R&D intensity for their R&D expenditure.

CURRENT LAW: R&D entities with aggregated turnover of $20 million or more are entitled to a non-refundable R&D tax offset at a rate of 38.5 per cent.

R&D Intensity

Intensity Premium

Notional deductions greater than 4% and up to and including 9% of total expenses  4.5%

Notional deductions greater than 4% and up to and including 9% of total expenses  8.5%

Notional deductions greater than 9% of total expenses  12.5%

 

Schemes to obtain an R&D tax benefit​

NEW LAW: The Commissioner may also deny a tax benefit in the form of an amount of a refundable or non-refundable R&D tax offset that an R&D entity seeks to obtain from a tax avoidance scheme.

CURRENT LAW: The Commissioner may deny a tax benefit in the form of a deduction or notional deduction that an R&D entity seeks to obtain from a tax avoidance scheme.

The uniform clawback rule

NEW LAW: Recoupment amounts and feed-stock adjustments give rise to an amount of assessable income equal to the grossed-up value of the incentive component of associated amounts of R&D tax offset.

CURRENT LAW: Recoupment amounts are subject to a standalone tax of 10 per cent.

CURRENT LAW: One third of feed-stock adjustments are included in an R&D entity’s assessable income.

NEW LAW: An amount is included in the assessable income of the R&D entity that received or is entitled to the R&D tax offset in relation to a recoupment amount or feed-stock revenue received by a related entity.

CURRENT LAW: In cases involving related entities, the entity receiving a recoupment is subject to recoupment tax.

CURRENT LAW: In cases involving related entities, the R&D entity entitled to the R&D tax offset is subject to a feed-stock adjustment if the related entity receives feed-stock revenue.

Balancing adjustments for R&D assets

NEW LAW: The R&D entity’s assessable income is increased by an amount equal to the grossed-up value of the incentive component of the associated amounts of R&D tax offset.

CURRENT LAW: For an R&D asset held only for R&D purposes where the balancing adjustment amount is included in the R&D entity’s assessable income – the amount is generally increased by one third.

CURRENT LAW: For an R&D asset held partially for R&D purposes where the balancing adjustment amount is included in the R&D entity’s assessable income – the R&D component of the amount is generally increased by one third.

CURRENT LAW: For an R&D asset held only for R&D purposes where the balancing adjustment amount is allowed as a deduction – the deduction is included in the R&D entity’s R&D tax offset calculation.

NEW LAW: The R&D entity is entitled to a deduction equal to the grossed-up value of the incentive component of the associated amounts of R&D tax offset that would have been obtained if the R&D component of the balancing adjustment amount was included in the calculation of the offset.

CURRENT LAW: For an R&D asset held partially for R&D purposes where the balancing adjustment amount is allowed as a deduction – the R&D component of the amount is increased by one third or (for small R&D entities) or one half

NEW LAW: Similar amended rules apply to balancing adjustments for R&D assets held by R&D partnerships.

CURRENT LAW: Similar rules apply to balancing adjustments for R&D assets held by R&D partnerships.

NEW LAW: The transitional rules are amended in line with the primary amendments but continue to apply to R&D assets acquired before the introduction of the Incentive in 2011.

CURRENT LAW: Transitional rules apply to R&D assets acquired before the introduction of the Incentive in 2011.

Should you wish to discuss this matter further, please don’t hesitate to contact Gerry Frittmann on 02 8219 4900 or email gerry@tcf.net.au

Manufacturers Modernisation Fund Now Open

The Australian Government has announced a new competitive grant program for the manufacturing sector.

The Manufacturing Modernisation Fund will provide grants of between $50,000 and $1m to manufacturers to modernise, adopt new technologies, become more productive and create more jobs by co-funding capital investments and associated reskilling.

Modernisation can include technology upgrades, efficiency upgrades, such as energy or process optimisation, or more transformative changes to your business, which will allow you to produce new products or diversify into new markets.

The program has a $50m funding pool over 3 years and will be delivered through two streams of funding:

  • $20 million in co-funded matching grants (50/50) of between $50,000 to $100,000 for
    small scale technology and efficiency investments and;
  • $30 million for larger grants between $100,000 to $1 million which will fund 25% of total project costs to support transformative investments in technologies and processes.

The closing date for the 1st round of applications closes at 5pm on the 31st October, 2019

Round 2 successful applicants will be announced end of March 2020

Round 2 – Applications are expected to open in early April with a end of May lodgement deadline.

For 29 years, TCF Services continue to provide expert R&D Tax Incentive and other Government grants assistance for businesses across all industries.

For more details on the Manufacturers Modernisation Fund and how TCF Services can assist, please don’t hesitate to contact us.