R&D tax changes will be implemented retrospectively, inquiry hears, forcing businesses to revise claims later

R&D tax

The government wants to cut the R&D tax incentive. Source: AAP/Lukas Coch.

Businesses filing Research and Development Tax Incentive (RDTI) claims before proposed cuts to the program pass parliament will be later forced to revise their tax returns, a Senate committee has heard.

Officials from the Australian Taxation Office (ATO) and Department of Industry, Innovation and Science were grilled by the Senate Economics Legislation Committee yesterday over the timing of the Morrison government’s controversial RDTI reforms.

The estimated $1.8 billion cut to the program will be applied retrospectively from the 2019-20 financial year, meaning businesses filing RDTI claims between the current financial year (ending today) and when the laws are eventually passed will be later asked to revise their company tax return and R&D schedule.

Legislation enacting the cut is currently before the Senate, but will not be voted on until at least August, after the committee files its report; the ATO is legally required to administer the program under current laws until then, raising the prospect of back payments for 2019-20 claimants.

The potential for costly R&D revisions was a recurring theme throughout the hearing, with Labor Senator Kim Carr trading barbs with the Department of Industry’s Wayne Calder, who repeatedly refused to characterise the changes as retrospective, arguing the government has signaled an intention to change the scheme since 2018 and that taxpayers have known about the pending cuts for some time.

However, the ATO’s Jade Hawkins later conceded revisions would need to be made for 2019-20 claimants, referencing advice the ATO has recently published.

“We would be advising taxpayers who lodge in accordance with the existing law to do so, and then later revisions would be needed to their company tax return and R&D schedule, because of the effect that the retrospective legislative changes would have,” Hawkins said.

The ATO will not chase tax-shortfall penalties or any interest attributed to those shortfalls for companies revising their R&D claims, but it would nevertheless be likely that revisions would lower the quantum of tax refunds because the government’s reforms curtail the program.

Remco Marcelis, founder of business consultancy Standard Ledger, says companies making claims for the 2019-20 financial year should be mindful about any repayments they may need to make if the laws pass.

“Companies should definitely be aware of the possibility that if they claim the benefit at the 43.5% level they will (if the changes go through) need to resubmit at the 41% level,” he tells SmartCompany.

“We are doing calculations both ways so that companies know what they may need to allow for. Especially in the current climate we’re hoping that ATO will be flexible in any repayment arrangements.”

Companies have 10 months to register R&D activities after the end of an income year, making it technically possible to make claims for 2019-20 up until April 2021.

Tensions flare as reforms face widespread opposition

Tensions flared at several points throughout the hearing as the department and the ATO were asked about the retrospective nature of the changes and a more recent lack of formal consultation with industry.

The Morrison government has been trying to pass RDTI reforms —which introduce expenditure thresholds and R&D intensity hurdles — for several years, tabling a second version of the changes last December, following an earlier rejection from the bipartisan Senate economics legislation committee.

However, the new version of the Bill has not addressed business concerns, and it emerged on Monday the Department of Industry did not consult with industry participants on the latest Bill, instead relying on previous submissions made in response to earlier versions of the proposal.

“I’m trying to understand why when there’s adverse commentary on things that will materially affect the economy; you’ve sat in your office and not called any of the submitters to talk through their concerns about the legislation,” Centre Alliance Senator Rex Patrick said.

“I’m just flabbergasted. Today I’ve seen the quintessential Canberra bubble in operation,” Patrick later said.

Business lobbyists continue to argue the imposition of extra conditions will disincentivise R&D investment in Australia, while the government has previously said the program is not working as intended, subsidising “business as usual” investments rather than encouraging research that would not otherwise be done.

Lobbyists close ranks around dismal R&D investment

During Monday’s hearing, industry groups closed ranks behind a claim that several businesses would shift their R&D operations offshore if the legislation passes, making a case that the Bill should be scrapped in its current form, possibly to be replaced with other measures that reform the program without pulling money out.

Manufacturing Australia chief executive Benjamin Eade said all his members will be worse off if the Bill passes, arguing the cuts run counter to the Morrison government’s desire to encourage local manufacturing and self reliance in the wake of the COVID-19 pandemic.

“The net outcome is you will have less R&D happening here,” he said.

Australia’s R&D spending as a percentage of GDP fell from 1.88% in 2015-16 to 1.79% in 2017-18, according to the ABS, and remains well below the OECD average of 2.37%.

However, lobbyists painted the Bill as bad for investment despite providing no concrete evidence that businesses will shift R&D operations offshore, although it remains in their interests to make this argument irrespective of what subsequent investment decisions are made.

Under questioning from Patrick, Calder said the reforms were designed to better target the incentive.

“Whether companies undertake R&D activity or not is a decision for those companies based on the commercial opportunities.”

The government’s current slate of reforms were inspired by a 2016 review of the RDTI which found the program was not meeting its stated aims and could be changed to “encourage additional research and research spillovers into other sectors”.

Morrison moves forward with clouded forecasts

But the Morrison government now faces the prospect of moving forward with the reforms while even their own modelling of taxpayer savings is clouded in doubt.

Treasury said the RDTI changes would save taxpayers $1.8 billion in 2018, but that was before bushfires and the coronavirus pandemic put Australia on track for its first recession in almost 30 years.

Treasury indicated on Monday it would revise these figures, but provided no timeline for when this work would be conducted, or released publicly.

Federal Labor leader Anthony Albanese added to the political stakes around the proposed changes last week, calling for the Morrison government to dump the reforms.

Labor’s small business spokesperson Brendan O’Connor said on Monday R&D spending was “suffering under the Coalition”.

“Australian businesses need support more than ever to not only survive but thrive post pandemic, yet this governments solution is to withdraw support that gives them that opportunity,” he said in a statement.

Government eyes only: Response to ASBFEO report hidden

Late last year, small business ombudsman Kate Carnell published a scathing report into the administration of the RDTI by the ATO and the Department of Industry, claiming the government bodies had behaved reactively, aggressively and inconsistently towards claimants over the life of the scheme.

There has been longstanding criticism over RDTI administration, particularly following high-profile cases where startups like Airtaser were hit with multimillion-dollar back-payment bills for R&D claims.

Carnell made two dozen recommendations for improving the administration of the program, including cracking down on dodgy R&D consultants, which make complex claims on behalf of businesses that can be later audited by the ATO and found to be lacking, requiring back payments.

But it emerged on Monday that the Morrison government’s response to that report would not be made public, raising questions about whether it would adopt any of ASBFEO’s advice.

The ATO did agree to publicise its joint response with the Department of Industry, which does not address each recommendation individually but instead groups ASBFEO’s advice into seven “themes”, not all of which even outline specific actions that would be taken in response to the ombudsman’s findings.

The response, seen by SmartCompany, was sent to ASBFEO in February and commits the administrators to increasing their level of engagement with companies and up skilling R&D advisers within their offices.

“Both DISER [the department] and the ATO are consistently working to improve the way we administer the RDTI program. We appreciate your report’s acknowledgement of the reform activities our agencies have underway, which focus on creating a better customer experience whilst maintaining the integrity of the program,” an accompanying letter to the response reads.

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