Government rules out further changes to R&D tax credit system

Industry groups appear to have lost their battle to force further changes to the Government’s R&D tax credit system, with Federal Industry Minister Kim Carr planning to introduce the legislation into Parliament on Thursday.

The tax credit, due to come into effect on July 1, has been criticised by some industry experts and the Australian Industry Group as being too complex and restrictive, with some claiming “commercially focused” R&D will no longer be eligible for assistance.

But Carr has shrugged off the concerns, telling the Australian Financial Review that the Government has already addressed the “substantive objections” to the new system.

“I’m determined to push ahead with it. It’s a bloody good bill.”

The Government has already been forced to make a series of major changes to the R&D tax credit system after the first draft was slammed by R&D experts for introducing too narrow a definition of R&D.

Whereas the current tax credit schemes require eligible R&D to be either innovative or risky, the first draft of the new tax credit legislation required both tests to be met.

The first draft also made software development ineligible for the R&D tax credit.

However, the second draft reversed these positions. But the second exposure draft, released late on March 31, includes an entirely new – and much broader – definition.

Under the proposed changes, core R&D activities must be “experimental activities whose outcome cannot be known or determined in advance”, must use a “systematic progression of work that is based on principles of established science” and must be “conducted for the purpose of generating new knowledge (including knowledge about the creation of new or improved materials, products, devices, processes or services)”.

The Government also reversed its position on software, which will now be eligible except where it used for internal administration.

However, the Australian Industry Group was still not happy with the bill and has been pushing the Government to “stem the erosion of support for business investment in innovation and research and development including by removing the proposed restrictions on eligibility for the R&D tax concession” as part of its pre-Budget submission.

Sandra Mason, a partner at PricewaterhouseCoopers, has also pushed the Government to make further changes to the Bill, saying it contains too any hurdles for companies to get over if they want to access the credits.

Of particular concern for Mason is the new “dominant purpose” test, which says companies hoping to claim on “supporting” R&D will need to prove that work is for the dominant purpose test of supporting “core” R&D.

Mason argues the dominant purpose test goes too far, particularly for commercially focused R&D, and says traditional “supporting” R&D activities such as market research, market testing, market development and feasibility studies usually have a dual purpose of supporting core R&D and furthering a firm’s commercial strategy.

She also wants more clarity around the feedstock rules, which are yet to be released in their final form.

“They are two technical aspects but they will make a big difference to many companies,” Mason told SmartCompany.

“Our position hasn’t changed. While we have welcomed the opportunity to consult with the Government we do see some areas that will require further change or amendment after the bill is passed.”

However, the fight for further changes to the tax credit might not be over, as Opposition innovation spokesperson Sophie Mirabella has signaled the Opposition will consider voting against the bill in the Senate.

Mason hopes there is a chance to push for further change at the Senate level.

“We would also welcome the possibility of working with the Senate… to ensure that it’s a workable policy and its not too complex. Companies need a simple system to work with.”