Government must delay new R&D tax credit scheme for 12 months: Expert

A host of “unanswered questions” hanging over the Rudd Government’s new research and development tax credit scheme should force the Government to abandon its July 1 start date for the scheme and delay it for 12 months, KPMG tax expert David Gelb says.

Gelb has also moved quickly to clarify his firm’s stance on the R&D tax credit scheme, after Industry Minister Kim Carr claimed earlier this week that a KMPG report had described the R&D tax credit as “the best in the world”.

As highlighted by SmartCompany, the report only named Australia as having the best R&D tax system for pure R&D companies. Overall, Australia was ranked fourth, behind Mexico, Canada and the Netherlands.

Additionally, after taking the new tax system account, KPMG ranked Australia ranked fourth for companies in the manufacturing sector and sixth for companies in the corporate and IT sector.

KPMG is also keen to reinforce that it is not impressed with the Bill in its current form, and that if it is passed if could actually lead Australia’s R&D ranking to diminish.

Like other R&D experts, Gelb believes the current design of the R&D tax credit system will limit accessibility to the scheme, particularly for companies in sectors such as manufacturing, mining and IT.

With less than 30 days until the R&D credit system is due to come into force on July 1, the bill still needs to pass the Senate. A Senate inquiry into the new scheme is due to hand down its report on June 15, leaving only a small window to get the Bill through the Upper House.

Whether the Bill gets through the Senate is another matter. The Opposition has indicated it will oppose the Bill in its current form, which means the Government will need to win over the Greens or independent senators Nick Xenophon and Steve Fielding.

Regardless, Gelb wants the introduction of the tax credit scheme delayed for 12 months and says a July 1 start date “it just too hasty”.

“That would be far a more equitable outcome, provided the changes and modifications are made to the Bill. At the moment there are just too many unanswered questions,” Gelb says.

“The proposed changes are very radical and change very significantly what has been an established practice for the next 25 years. In that context it is only fair that companies are given time to understand how the new system will work.

“If this is meant to be an incentive, you need time for companies to modify their behaviours accordingly.”

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 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.

But modelling from accounting firm BDO presented to the Senate Inquiry showed even the revised Bill would have an impact on the amount of R&D support received by the mining and manufacturing sectors.

BDO’s forecasts suggested 90% of the firm’s current claimants in the mining sector would have their claims reduced by at least 80%, with 10% of claimants not being able to access the tax credit at all.