Government introduces amendments to R&D tax credit but experts say legislation isn’t ready to support SMEs

Tax experts have welcomed two new amendments to the Government’s new research and development tax credit legislation but say the changes don’t go far enough and further amendments are needed to get the bill up to scratch.

The Government tabled the bill yesterday but will need the support of independent MPs in order to pass it through the House of Representatives.

Innovation minister Kim Carr announced yesterday the details of the two amendments, which state that activities during the development phase used to acquire new knowledge in the form of improved materials and products or services can be eligible as R&D. Experts say this provides more clarification to smaller businesses about what activities constitute R&D.

The second amendment confirms experimental activities can be classed as R&D and that “factory floor R&D” will be included in the tax credit.

Tax counsel at the Institute of Chartered Accountants, Yasser El-Ansary, says the changes provide further clarification for smaller businesses and will help many firms determine what can or cannot be used for the credit.

“This is certainly an improvement on the bill that went to Parliament back in May. And anything that helps to better articulate the intended objective of the new credit regime is a positive step.

“There was some concern earlier this year that the objects clause did not make clear enough the objectives of the bill – that is confirmed now. And there were also concerns that R&D could only be carried out through production tests or trail processes, but not now experimental activities have been covered.”

KPMG lead partner David Gelb also says the amendments are “a positive move forward”, and says “they address the concerns raised by industry some months ago”.

However, they say these changes don’t go far enough. El-Ansary says the bill still needs to have a new starting date and the dominant purpose test needs to be worked.

“First and foremost from our point of view,” he says, “the proposed start date must be delayed until July1, 2011. The independent members of the House of Representatives will have to put significant pressure on the Government to do the right thing by the business community on this issue.”

“It’s clearly not practicable nor workable for businesses to retrospectively apply tax laws that represent a significant burden.”

Carr has previously told SmartCompany the Government will continue to support a retrospective start date, and in yesterday’s announcement the Government again confirmed the bill would cover expenditure from July 1, 2010 onwards.

The second issue, he says, is that the dominant purpose test needs to be reworked. The test states that companies hoping to claim on “supporting” R&D will need to prove that research is for the dominant purpose of supporting “core” R&D.

“The Senate Economics Committee has recommended that businesses with annual turnover less than $20 million should be exempt. That’s an important amendment.”

Gelb agrees. He says the industry is concerned about the dominant purpose test and wants the government to start thinking about alternatives.

“Until that issue is addressed it seems industry will not be convinced that the benefits of an R&D credit or higher rates are adequate in the context of the bill. These amendments simply don’t go far enough.”

However, El-Ansary praises the minister for saying he will introduce a panel of experts to advise him on any “unforseen consequences” of the bill.

“In addition to amendments to the Bill, the Government has agreed to focus specifically on the dominant purpose test when the R&D Tax Credit is reviewed in three years’ time,” Carr said yesterday.

“The Government will also establish a panel of R&D Tax Credit users to advise me and the Department on any unforeseen consequences of the new R&D Tax Credit.”