Kate Carnell to review R&D tax incentive processes, while tax commissioner lays blame with advisory industry

R&D tax incentive

Australian small and family enterprise ombudsman Kate Carnell.

Small business ombudsman Kate Carnell has launched an investigation into the R&D tax incentive scheme, following the debacle last year that saw the ATO demanding millions in repayment from startups it said had claimed wrongly.

However, the ATO’s tax commissioner has shirked responsibility, instead blaming the furore on unreliable R&D advisors looking to line their own pockets.

In a statement, Carnell called for a review to clarify the legislation, and how it is enforced.

The move follows “a number of complaints” from small businesses saying they have been treated unfairly by the ATO and AusIndustry regarding their R&D claims, she said.

“Of particular concern are audits going back several years, which have resulted in the ATO demanding businesses repay the R&D Tax Incentive, often with a severe penalty applied,” she added.

“Unfortunately some of these businesses have been told to pay back the tax benefit years after the R&D has been completed. This is well after they received the refund from the ATO and reinvested that money back into the business.”

Late last year, a report in The Australian Financial Review revealed startups, including Airtasker and Digivizer, had been ordered to repay millions in R&D tax incentive dollars claimed in previous years.

According to the report, Airtasker’s claims from 2014 and 2015 had been audited and rejected, leaving the business facing not only repayment of the claims, but a 75% penalty on top.

In the statement, Carnell said the investigation will relate to $200 million the ATO has tried to reclaim.

The question lies in whether the tax incentive can be claimed on research relating to software.

“We’ve had additional feedback from software industry representatives that the interpretation of the laws by AusIndustry and the ATO, regarding the eligibility of software claims, has become more rigid,” the ombudsman said.

For startups, in particular, this poses a quandary — many businesses are based entirely on the software they produce.

The ATO’s crackdown on claims for software, therefore, threatens to deter startups from trying to claim at all.

Speaking to StartupSmart last year, StartupAus chief Alex McCauley noted the political view of software startups is “less rosy” than it has been in the past.

Claiming the R&D tax incentive is “not a low-risk option any more”, he said.

Carnell said this review intends to address those concerns.

“Certainty is essential if the R&D tax incentive is to fulfil the purpose of the legislation, which is to incentivise small businesses to invest in R&D,” she said.

Speaking to StartupSmart, Remco Marcelis, founder of startup accountant Standard Ledger, welcomes the investigation, and any clarity it could bring to the R&D scheme.

“All the startups in the industry … at the end of the day, we’re all looking for clarity,” he says.

While some updates to the regime regarding software have helped a little, they’re still not particularly clear, he says.

And “I believe they’re enforcing it in a way that they hadn’t before”, Marcelis adds.

Ultimately, it would be better for the industry to know what’s going on in the first place, rather than finding itself on the back foot.

“The industry is learning by getting pushback rather than getting clarity upfront,” he says.

“A problematic area”

Speaking at the COSBOA 2019 National Small Business Summit, ATO commissioner of taxation Chris Jordan acknowledged this is an emotional topic for startups and small businesses that rely on the incentive.

“People are often extremely passionate about what they’ve done,” he said.

But, he also noted the scheme has been “a problematic area for a number of years”.

The ATO finds itself in “a difficult position”, in which it has to review applications and potentially reclaim benefits awarded for activities that aren’t strictly covered.

Particularly, he doubled down on software startups, suggesting many believe they’re entitled to the tax break just because they’re developing an app.

“Well, there are definitions and there are requirements,” he said.

“There are a lot of apps around these days, so you have to be pretty innovative to qualify in terms of new ways of doing things.”

Rather than addressing the process of granting and then reviewing R&D tax incentive claims, Jordan took aim at advisors in the space.

“There’s an industry of advisers out there that know all the buttons to push and the words to use in the application,” he said.

“Often it’s done on a commission basis,” he added, suggesting that R&D advisors could be in line to receive 30% of a company’s rebate.

“So, there’s an incentive there,” he said.

“It’s highly emotive, and a difficult area,” he added, observing that some other countries offer grants instead of tax refunds, to avoid this kind of debacle.

“What I’d say is, wherever there’s government money to be had, people will try to get it.”

Speaking as an adviser himself, Marcelis accepts any time someone is incentivised by a commission, “it’s open to misinterpretation”.

He also says he doesn’t necessarily agree that commission-based advice is the way to go. The amount of work required doesn’t proportionally increase in line with the size of the rebate, he explains.

“Does that mean that advisors, who are typically bound by professional standards, do that? That’s probably a bit of a tall order — tarring everyone with that same brush,” he says.

“They’re bound by their own ethics as well as accounting codes of conduct,” he adds.

While there are “occasional cowboys” in the advisory business that could take advantage of commission-based pricing, Marcelis doesn’t feel it’s a widespread problem.

“You can’t blame the whole industry for that.”

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