Chapter 7
Administrative and transitional measures
7.1
As is presently the case, the R&D tax incentive will be jointly
administered by the Commissioner of Taxation and the Department of Innovation, Industry,
Science and Research (through the Innovation Australia Board).
7.2
At present, Innovation Australia (IA) is responsible for registering
R&D activities of eligible R&D entities; the Commissioner is
responsible for determining the concession available through the assessment
process following lodgement of the company's return. These agencies will retain
these responsibilities under the new arrangements.
Administration
Current arrangements
7.3
As explained in Chapter 5, accessing the existing R&D tax concession
requires that an entity register with Innovation Australia. Although annual
registration does not mean that an entity's R&D activities are eligible, it
allows IA to monitor the activities of registered entities, on a risk
assessment basis. Entities are required to self assess their eligibility
although may later be subject to 'audit' by IA.[1]
7.4
Innovation Australia (the Board) is an independent statutory board that
assists with the current administration and oversight of Government innovation
programmes delivered through the Department of Innovation, Industry, Science
and Research.[2]
Innovation Australia also has functions relating to promoting
the development and improving the efficiency and international competitiveness
of Australian industry by encouraging research and development activities,
innovation activities and venture capital activities.[3]
7.5
The Tax Concession Committee within Innovation Australia provides advice
to the Board about the operations of the R&D tax concession. It is the Tax
Concession Committee that is responsible for assessing the eligibility of
R&D.[4]
Proposed arrangements
7.6
Under the new administrative framework, which will be introduced in
Division III of the IR&D Act 1986, entities will continue to self–assess
whether or not their activities are eligible for the offset under Division 355.[5]
A number of new requirements will however be introduced.
Registration
7.7
Under these new provisions, R&D entities will be required to seek
registration of their activities with IA. Although this is an existing
requirement, under the new provisions, there will be a requirement that those
entities, when applying, separately identify core and supporting R&D.[6]
The Board will then be required to confirm or reject all requests for
registration of an entity's activities as either 'core' or 'supporting'
activities.
7.8
This aspect of the proposed registration process attracted considerable
criticism from submitters who are of the view that the requirement to
separately identify core and supporting activities in their application will
add compliance cost and is directly opposed to the self assessment regime in
which the broader tax system currently operates.
Disappointingly, claimants will still be required to document
and cost core and supporting R&D activities separately on registration of
their activities. This will be a heavy burden on all claimants and in
particular many of the SMEs that are the focus of this new bill.[7]
...it is a major concern that the Bill allows for registrations
to be rejected purely on the content of the submitted form. The registration
process has been made more complicated...This is not a self assessment
environment.[8]
It is not clear why the administration regime for the new
R&D tax credit needs to be more strict than the normal income tax
self-assessment system...This power is unlike that of the Commissioner of
Taxation who accepts a company's statements in its income tax return at the
time of lodgement...Innovation Australia, appear to be stepping away from a
self–assessment system...the Bill appears to give greater powers to IA to
unilaterally reclassify activities and reject registrations...IA is not required
to make any of its decisions or findings within particular timeframes...The
registration process should align with the income tax self assessment
process...Under a self-assessment regime, a company should also be deemed to be
registered in respect of R&D activities upon lodgement of its Application
for Registration.[9]
It is reasonable to expect that the proposed changes will add
complexity and require companies to invest greater internal resources to the
claim process. In particular, the requirement for claimants to distinguish
between these activities has the potential to discourage companies from lodging
an R&D tax credit claim.[10]
7.9
In addition to the concerns that the new registration process moves away
from the self-assessment regime was a concern that the Department does not have
the industry expertise to make these judgments. When questioned as to the
suitability of their staff for this role however, the Department commented
that:
Our role is to apply the law to the projects that we see. The
decisions we take are supported by private sector experts. That is why
Innovation Australia, the statutory body, are the group that have control of
the program in an administrative sense; they are private sector experts. Where
we are unsure, we do two things. We use industry experts to help us. We
commission them to look at the projects and give us a report and then we
utilise that information in making our decisions. We also use the experts on
our tax committee and on Innovation Australia to vet our decisions, because at
the end of the day they make decisions under the current program.[11]
Committee view
7.10
Having considered the evidence presented throughout the course of the
inquiry, the Committee takes the view that the Department, through IA, will
have the expertise, requisite knowledge and skills to make decisions regarding
the registration of applicants.
7.11
The Committee notes the Department's undertaking to provide two levels
of information — general guidance material (fact sheets, guidelines, etc) and
public findings[12]
and takes the view that the provision of such guidance material should mitigate
the compliance impacts that were raised by some submitters.
Findings
7.12
In addition to the changes to registration, other amendments that will
affect administration of the R&D tax incentive are being introduced. They
include:
(a)
the Board may choose to consider an application in more detail and make
a formal finding in relation to all or some of the activities mentioned in the
application; an applicant's registration will be automatically varied to be
consistent with a finding of the Board;
(b)
an entity may request an advance finding;
(c)
an entity wishing to claim a tax offset for activities conducted outside
of Australia must apply for a finding — this is required to be an advance
finding; and
(d)
the Commissioner of Taxation can ask the Board to make a finding that
particular technology is or is not core technology.[13]
7.13
The subject of findings did not attract attention throughout the
inquiry.
Transitional measures
7.14
The amendments set out in Schedule 2 of the bill that will introduce the
new Part III of the IR&D Act 1986 will commence from 1 July 2010. The
provisions they are replacing will be repealed but, as the Board will still
require powers in relation to what will be the 'legacy' R&D tax concession,
some provisions of Part IIIA will be preserved through transitional
arrangements.[14]
Drafting comments
7.15
Throughout the inquiry it was contended that the explanatory memorandum
and bill contained minor drafting errors. A list of the 'errors' identified is
attached in Appendix 3.
Recommendation 6
7.16
The Committee notes the claim of drafting errors. The Committee notes
that minor drafting errors are common when framing new legislation. The Committee
does not believe that these minor errors are of sufficient magnitude to delay
passage of the bill but considers it preferable that they be dealt with before
the bill is enacted.
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