Key business group slams new R&D tax concession proposals

The Australian Industry Group has hit out at the Government’s proposed changes to the research and development tax concession, saying they would stifle innovation and place the country further behind other developed nations.

It also warned the new proposals would see a financial burden placed on businesses and further unnecessary complexity, but supported some aspects of the proposals including extending eligibility to companies partly owned by exempt entities.

The submission to the Government comes after the software industry has slammed the proposals, saying the new concession rules would exempt many small tech businesses from receiving benefits.

One of the major areas of controversy for the AIG is the Government’s proposal of new definitions of R&D for tax purposes. Chief executive Heather Ridout said in the submission these definitions were “the strictest and most complex… anywhere in the world.”

The Government is proposing replacing the term “innovation” with “considerable novelty”, but Ridout said this is inadequate and gives rise to uncertainty, as some research and development projects are not necessarily “novel”.

An example of this would be making new modifications to an old product, including software, or even machinery.

“This has the potential to lead to highly contentious interpretations not prevalent in the current scheme. Importantly, it is more likely to narrow the field of potential claimants and result in a reduction in the total value of overall public funding to stimulate private R&D.”

Another major problem, Ridout says, is the introduction of a requirement of both innovation and technical risk, compared to the previous “or” rule.

“This would require a significant increase in current resource allocations to Innovation Australia, including access to a cadre of global leading scientists and innovators.”

“The result, therefore, is likely to be that many genuine R&D activities will be excluded on the basis of incomplete knowledge and understanding of a given endeavour.”

Ridout also contested the “dominant purpose” test, which specifies concessions are available for activities that are conducted for the dominant purpose of supporting “core” activities, rather than for other purposes, such as commercial release.

“Proving that activities can ‘serve, or be conducted for, more than one purpose’ is likely to be a highly contested space with claimants.”

Ridaout also says new “augmented feedstock” rules will favour narrow interpretations and will deliver a system that reimburses companies for failed R&D projects, rather than concessions for the time when R&D decisions are decided upon.

The augmented feedstock rule will dictate that benefits can only be given out after the market value of the R&D projects has been assessed.

“Because benefits can only be calculated on the after market value of R&D, the administration of a company’s R&D affairs take on an altogether different level of complexity. This is especially the case for claimants where the pay back period on the R&D is lengthy.”

“The accounting of projects will become unnecessarily variable and complex given that the value of the output may be clawed back at a future date. For significant proponents of R&D, the requirement to amend prior year’s tax returns will become omnipresent, adding a significant burden of red tape.”

Ridout also attacked the decision to exclude a number of areas from eligibility for the tax concession, including software development. It the proposals are legislated, she warned, they would undermine investments in areas such as the National Broadband Network.

Additionally, she says the decision to exclude software as either a core or supporting activity “fails to recognise the primacy of information communication technology in driving productivity gains in the Australian economy in recent past”.

However, Ridout says there were aspects of the new scheme the AIG will continue to support, including the proposal to extend eligibility to R&R undertaken regardless of where the IP is owned, the change in eligibility for companies partly-owned by exempt entities and the proposal to increase incentives for eligible expenditure.

She said the Government should continue with the scheme but relax the restrictions on eligibility, in favour of the already established definitions, and make available modelling of the impact of removing the 175% concession.

“The Australian Industry Group believes that, if enacted, the incentive for industrial R&D would be substantially reduced. In so doing, it would slow business-led productivity improvements and future economic growth.”

“Reversing the positive trend that has occurred in BERD in Australia over the past 20 years would be a most unfortunate outcome. Australia continues to lag the OECD average on this important indicator and should be making every effort to close this gap.”