Fact or Fiction?
Historically, most government funding programs begin with a bang, invariably take a dip as examples of misuse come to light, then go through several peaks and troughs and, hopefully, don’t end with a whimper. They go through waves, if you like, and the Federal Government’s R&D Tax Incentive (research and development) is no exception. When changes to legislation are made, businesses and their advisers must assess its implications on the company’s financial position.
Following its much-heralded launch in 2011, the R&D program participation almost doubled from approximately 8,000 to 15,000 company groups, providing much needed working capital for these businesses. This growth was largely attributable to the uncapped cash refunds associated with claims made under the 43.5% Refundable R&D Tax Offset for those with a group turnover of less than $20 million that were in tax loss.
Using the wave analogy, the initiative has experienced two waves to date. 2011 through to 2015 was initiative promotion and popularity: The First Wave.
In recent times, however, the tides have turned and media surrounding the program has focused on regulators’ crackdowns (AusIndustry and the ATO) with supposed tightening of eligibility criteria, and anecdotally: a proliferation of inexperienced accountants producing incorrect/insufficient service (document preparation) that tarnished the program’s reputation, considerably. The Second Wave.
This second wave seems to suggest that businesses qualifying or receiving R&D grants need to re-assess their financial position in light of the alleged tightening of criteria.
The March 2017 release of ATO Taxpayer Alerts with respect to the R&D Tax Incentive comes on the back of several AusIndustry publications. Those included practice notes asserting “getting claims right” and reissued sectoral guides that have heavily beefed up with describing compliance requirements.
This information flowed as the market awaits the Federal Government’s recommendations regarding the 'Triple F' Report (named after the three authors—Bill Ferris, Alan Finkel, and John Fraser) reviewing the incentive, and has caught people somewhat on the hop. The result has been much speculation as to whether something has changed regarding the current incentive eligibility criteria.
The short answer is no. In fact, the Triple F Report recommended the legislation on the eligibility of R&D activities and R&D expenditure should not be changed for at least another five years. (And what a good idea that is!) Taxpayers who have the appropriate protocols in place should continue their approach to making sustainable R&D claims.
In speaking with R&D tax experts, we can shed light on exactly what has changed. Kris Gale, Chairman, Michael Johnson Associates, stated:
“R&D tax law has been notoriously volatile so it is somewhat ironic that the claiming community has interpreted the ATO Taxpayer Alerts as an indication that the law has changed where the Federal Government is likely to soon confirm that no legislative changes should be made prior to 2021. If adopted, that would mean ten years of program stability in terms of both R&D activities and R&D expenditures. This would be an unprecedented development.”
Despite the reality described above, the market remains spooked, particularly for startups in the information technology space. However, real comfort can be derived from what an ATO spokesperson said in a recent interview with StartupSmart when asked about the impact of the ATO Taxpayer Alert concerned with software development:
"...the alert doesn’t represent a new law or a change to existing rules", but rather it is “a reminder to businesses to be mindful of the activities which they might claim is a tax incentive”.
“As with any software development company, startups should take note of the warnings outlined in the recent R&D taxpayer alerts, to make sure any claims that are made match the legislative requirements, with proof that they are undertaking actual research and development as part of their business,” the spokesperson says. “Startups should ensure that activities are generating new knowledge or undertaking experimentation of new technologies; that the technical uncertainty being addressed by the activity is clearly identified; and that the activities claimed are directly related to supporting experimental activities.”
In summary, the takeaway message for those currently claiming the R&D Tax Incentive and their advisers: Keep calm, follow the legislation and carry on your sustainable claiming practices. But be mindful to manage and monitor your financial position closely. Do that and you will emerge from the tube associated with the Second Wave upright and surfing towards an innovation-driven future.