Chapter 6
Complexity and changes
Complexity and compliance costs
6.1
This bill will introduce aspects of the recommendations that came out of
the Productivity Commission's 2007 review; through these changes the Government
is seeking to simplify the operation of the R&D tax incentives and more
effectively target funding at small and medium enterprises.
6.2
A recent study in the United Kingdom has illustrated that these benefits
can be achieved through simplifying the tax laws that act as an incentive to
investment in R&D.
A recent ...paper on the impact of the R&D tax credit in
the UK found that 42% of firms surveyed identified the cost and the information
obligation for claiming the tax credit on R&D as the main hurdle to filing
a request... Canada has simplified its processes...this has...anecdotally...[led] to
increases in claims...[1]
6.3
Whether or not these aims will be achieved by this bill received much
attention throughout the inquiry. Some submitters are concerned that the new
provisions are in fact more complex and as a result will increase compliance
costs to such an extent as to act as a disincentive for those at whom the
measures are targeted.
The third element of our opposition to the proposed approach
is that it will increase compliance costs. Under the proposed approach,
business will need to split its R&D activities into core R&D
activities, directly related supporting R&D activities and supporting
R&D activities subject to the new dominant purpose test. This...will add
substantially to the business compliance costs of the program...the case, the
extra compliance costs will fall disproportionately on smaller businesses...Our
claim about compliance costs is very different to the claim made by the government
in the explanatory memorandum. We think the government’s claim is wrong.[2]
As you know, under the current R&D regime, there is a
requirement for R&D plans. While that requirement will not exist under the
new legislation, there will nonetheless be a significant amount of additional
planning required by companies so that they can reassess the eligibility under
the new definition, on the one hand, and also, importantly, to predetermine,
perhaps throughout the annual life of a project, what activities will now be
core and what will be support.[3]
[T]he nature of the activities that are to be supported by
the bill; the burden of proof and evidence required to sustain eligibility by
all claimants; and the compliance burden that will be imposed on claimants who seek
to benefit from these provisions.[4]
The structure of the core and supporting R&D provisions
will not only unduly limit corporate R&D claims but will also result in
significantly higher compliance costs.[5]
Committee view
6.4
The Committee notes that the Department and the Australian Tax Office
have been allocated $38 million in their budget for additional guidance and
support for companies applying under the new legislation.
6.5
The Committee also recognises the intention by the Government that these
measures be revenue neutral.
6.6
Nevertheless the Committee recognises that some businesses, particularly
small businesses, may struggle with planning and compliance and is concerned
this might restrict the ability of some to access the R&D incentive.
The provision introduces a highly subjective component, which
will necessarily increase compliance costs and cause confusion and
inconsistency in its application.[6]
You may even want to consider whether or not you have a
multi-stage purpose test for those organisations that are SME. Maybe they do
not have to meet it...[7]
Recommendation 4
6.7
The Committee recommends that companies with revenues under $20 million
be exempt from the dominant purpose test.
6.8
In addition to concerns regarding the new application arrangements
(discussed in Chapter 7) considerable concern has been raised in respect of the
proposed feedstock amendments.
The feedstock provisions
6.9
The explanatory memorandum explains at paragraph 3.134 that feedstock
adjustments apply in relation to good or materials that are transformed or
processed during R&D activities that produce one or more tangible products
(feedstock outputs). An adjustment also applies to energy that is input
directly into processing or transformation.[8]
6.10
This 'adjustment' claws back the incentive component of the R&D tax
offset that is enjoyed on recouped feedstock expenditure.[9]
The 'incentive component' is the excess of the tax offset over the company tax
rate[10]
– for example, for companies with a turnover of more than $20 million who are
eligible for the 40 per cent non‑refundable offset, the 'incentive
component' is 10 per cent. Feedstock expenditure is considered to be recouped
in circumstances where the product(s) produced (the feedstock output) is sold
or supplied to another entity.[11]
The following example of the application of the feedstock provisions is
provided in the explanatory memorandum:
Example 3.14: Feedstock output a marketable product
Lisowski Crushing Pty Ltd acquires granite boulders from an
adjacent quarry and crushes them into small stones for sale to landscapers.
Lisowski identifies a significant potential market for ‘mock dirt’ that will
not blow away. Lisowski engages consultants to research and design a diorite
stamping head that will crush the granite to fine grains, and has a set of the
heads fabricated and fitted to a stamping machine that has been suitably
modified. It conducts experiments on 10 tonnes of granite to test the
effectiveness of the diorite heads. The resulting granulised granite is sold
shortly after to the trade at a special introductory price.
Feedstock expenditure of $10,000 is included in the $22,000
of notional deductions claimed by Lisowski for the R&D activities. Lisowski
Crushing has a turnover of $100 million per annum and receives a non-refundable
tax offset of $8,800 (40 per cent × $22,000). The potential for the granite
granules to be sold in either that or a subsequent income year has no bearing
on the size of this tax offset.
The 10 tonnes of granite granules are sold for $900 per
tonne. As this is an arm’s length price the feedstock revenue is $9,000.
Because the feedstock revenue of $9,000 is less than the feedstock expenditure
of $10,000, the feedstock adjustment is based on the $9,000 feedstock revenue
figure. In addition to the $9,000 received from the sale, a feedstock
adjustment of $3,000 ($9,000 / 3) is included in Lisowski Crushing’s assessable
income. This feedstock adjustment is made for the income year in which the
granite granules are sold, which might be the same year as the R&D activities
that produce them, or a later year.
The sale occurs in the same income year as the R&D
activities. Allowing for the $10,000 tax deduction forgone in order to receive
a 40 per cent tax offset on the feedstock expenditure, the incentive component
of the tax offset was $1,000 ((40 per cent – 30 per cent) × 10,000), which
reduces Lisowski Crushing’s income tax liability by that amount. Including the
feedstock adjustment in taxable income increases Lisowski Crushing’s income tax
liability by $900 (30 per cent × $3,000). The net ‘tax benefit’ of $100 (1,000
– 900) is equivalent to only allowing the 10 per cent incentive on the $1,000
(10,000 – 9,000) ‘net’ feedstock expenditure.[12]
6.11
Feedstock adjustments apply to both core and supporting R&D
activities and the adjustment is required to be included in the company's
assessable income.[13]
6.12
In providing evidence to the Committee, Treasury explained that the
feedstock provisions within the bill retain the effect of the existing
provisions.[14]
Treasury also advised that:
[the] feedstock provisions in the bill have the same scope as
under the existing law. For ease-of-use, the bill consolidates all the existing
feedstock rules in one subdivision and changes the form of the new feedstock
adjustment to that of an increase in accessible income rather than a reduction
in the R&D offset. The new mechanism overcomes several technical flaws in
the existing rule that can disadvantage taxpayers and avoids the need to put a
value on outputs at the end of each year that are not yet in a marketable
state.[15]
6.13
Their claim that the proposed provisions retain the same scope and
effect of the existing provisions has however been dismissed by numerous
submitters to the inquiry.
There are some feedstock provisions in this bill. They are
different from the old bill and they would appear to be more of a tightening
position than the old bill. ... these current feedstock provisions are a
tightening and, if that is the government’s intent, all well and good, but I
would not characterise them in any other way.[16]
6.14
There has also been much criticism of the fact that the 'augmented
feedstock provisions' that featured in the first exposure draft which were
redrafted to their current form were not exposed for public consultation until
the bill was introduced into the parliament.
Committee view
6.15
The Committee notes some concerns about the complexity of the feedstock
provisions set out in the bill but does not believe this will be a problem for
large companies. The Committee expects that some of the additional $38 million
in funding being provided to the Australian Taxation Office and the Department
of Innovation, Industry, Science and Research will be used to help small
businesses comply with the provisions.
Recommendation 5
6.16
The Committee recommends that a broad-based working group including
small business and union representatives be established to advise Innovation
Australia and the Department of Innovation, Industry, Science and Research
about any unforeseen circumstances that emerge as the bill is implemented. This
working group would also inform the two year review of the bill (Recommendation
7).
Calls for delay
6.17
Throughout the inquiry submitters agreed that several aspects of the
bill were positive and should be passed without delay. However, there were
calls by some to delay passage of the bill for a further 12 months to provide
more time for consultation and further modelling.
One of the biggest issues that we have had with this whole
process—and this was borne out yesterday—is that there has been no modelling
with which we can engage or comment on in relation to the likely impacts of
these changes at a macro level, an industry level or a sectoral level, so it is
hard for us to make these assessments.[17]
We believe the eligibility rules are flawed and the
implementation timetable is unreasonable...Caltex proposes the following changes
to the legislation:
- Delay the implementation of the
legislation until 1 July 2011 or later
- Amend both the core and supporting
R&D activities definitions [to adopt the OECD definition for R&D].[18]
Generally we support the broad aim of the introduction of a
more streamlined tax incentive however, after a review of the bill and explanatory
memorandum; the proposed changes are in direct opposition to the stated policy
objectives...more time is needed to introduce effective legislation that can
deliver on the stated policy objectives. From the limited modelling I have
seen, by simply repealing the 175% incremental deduction should go a long way
to making the current scheme more revenue neutral.[19]
MJA fully supports the introduction of the Credit as a
replacement for the Concession...MJA submits that more time is needed to properly
absorb and analyse the new concepts and allow ...stakeholders adequate time to
plan and prepare for the changes. Time is now so short that the prudent thing
for the Government to do is to announce a delay in the introduction of the
Credit for one year.[20]
6.18
The question of adequate time for consultation was raised with the
Minister during Senate Estimates on 31 May 2010, when he was asked why there
was such a rush for the legislation to be passed.
This is a budget measure. It starts on 1 July this year. It
is doubling the benefit to small firms and increasing their level of support
for large firms by one-third...the question you would be asking is not 'Why has
there been so little consultation?' because that is patently untrue, but, 'Why
is there such a campaign by such a small number of consultancy firms...that
control claims that are well in excess of $1 billion per annum?' The question
is: should we cave in to vested interests? I say we should not.[21]
6.19
The Minister further noted that:
It is not unusual with tax legislation; it is certainly not
unusual in this area of R&D policy. A good change does not necessarily mean
that every single person has to agree with it. That is not a measure of success
of government policy; a measure of success is whether it stands up to the
weight of evidence.[22]
Committee view
6.20
From the evidence it has collated throughout the course of its inquiry
the Committee takes the view that on balance, most stakeholders are in favour
of the new R&D tax incentive that will provide a refundable or
non-refundable tax offset to eligible entities.
6.21
The Committee considers that the calls for the delay of the bill's
passage relate to matters which it has sought to address throughout its
recommendations.
6.22
The Committee takes the view that the remaining opposition to the bill appears
to be an opposition to the Government's policy objective to target R&D
expenditure to small and medium enterprises and to do this through changes to
the eligibility criteria. The Committee supports this policy objective of the
Government and notes that the recommendations it has made will operate to
ensure that the objective is achieved.
Navigation: Previous Page | Contents | Next Page