Recent months have seen a lot of media coverage regarding the future of the R&D Tax Incentive programme, and how it is enforced and administered. With changes to the program under consideration by the Senate, a newly published AAT case, and some recent updates to compliance information from AusIndustry, now is a good time to look closely at your R&D tax claim processes to ensure all relevant legislative requirements are met. As always, if you have any questions regarding the operation of the Incentive (or any other grant programmes) and how these issues impact your business, please get in touch with one of our R&D team in our Sydney office on (02) 9126 9100.
R&D Amendments Referred to Senate Economics Legislation Committee
The Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018 (https://bit.ly/2CosRc0) was referred to the Senate Economics Legislation Committee was for inquiry and report by 3 December 2018. The Bill was introduced to the House of Representatives on 20 September 2018.
BSI previously submitted a response to the Treasury consultation on the Government’s 2018-19 Budget Measure - Better targeting the Research and Development Tax Incentive, citing concern that the (then) proposed measures would have negative impacts on the level of business expenditure on R&D.
Our sentiments were reiterated in a further submission to the Committee (available for viewing here) lodged last Monday, 5 November 2018. Given recent events in Canberra and the emergence of a minority Government, in is not yet clear whether this legislation will pass both House of Parliament before the next federal election.
Administrative Appeals Tribunal (AAT) – Moreton Resources Case Update
On 9 October 2018, Moreton Resources Limited lodged an appeal to Federal Court of Australia in relation to the negative decision from the AAT made in September 2018 (https://bit.ly/2Ne0ILo). The decision affirmed an internal review decision of Innovation and Science Australia (ISA) that R&D activities claimed by Moreton Resources were not eligible under the R&D Tax Incentive Programme.
The AAT was of the view that, although the development of a pilot Underground Coal Gasification (UCG) plant in a unique geographical area was an experimental activity, the pilot UCG project used known technology and, at the time the activities were undertaken, they were not conducted for the purpose of generating new knowledge. The AAT held that this view was supported by the representations of the project made by Moreton Resources in their internal (contemporaneous) documentation and communications with third parties.
Other activities were found to be non-experimental in nature or conducted to comply with Government regulations and therefore ineligible.
Crucially, the AAT’s Decision states at 204 ‘The evidence must point to the experimental activities having the relevant purpose at the time that the activities were undertaken.’ Subject to outcomes of the appeal, this reinforces the requirement for companies to properly document their activities. The Decision advances a view that the purpose of an activity is a matter of fact, and claims are not to be made on the basis of retrospective reconstruction.
Changes to the R&D Tax Incentive Integrity Process
Earlier this year the Department of Industry, Innovation and Science implemented changes to its compliance process in an effort to reduce the compliance burden for companies chosen for review and to improve the speed of this process.
The major change is that a company, upon a request for information (RFI) from AusIndustry, will have 30 days to provide evidence. A further 14-day period may be granted in certain circumstances. A fact sheet detailing the changes has been provided (https://bit.ly/2zjPcEH) detailing this change and reiterating other key information, being:
Claimants are responsible for making sure they meet the eligibility criteria for the program;
- Registration of R&D activities alone does not mean that these activities are eligible;
- To be eligible for this program, activities must be supported by records kept during the time a company conducted their R&D (known as contemporaneous records); and,
- The examination of a company’s registration may lead to a Finding about the eligibility of all or some of the registered activities. The company’s tax return may need to be amended if any of the registered activities are found to be ineligible.
Reminder about Record Keeping
According to the ‘Record-Keeping and R&D Planning’ fact-sheet produced by AusIndustry (https://bit.ly/2RVOlCx) , a key requirement of the programme is that companies must keep adequate records to demonstrate to both AusIndustry and the ATO that:
- They carried out eligible research and development activities (i.e. core R&D activities and supporting R&D activities);
- They incurred eligible expenditure in relation to those activities; and,
- Their R&D activities and expenditure met all other legislative requirements under the program.
Relevant records include those normally maintained to support income tax claims as well as those that cover the planning and progress of R&D activities. The records kept by individual claimants will vary depending on the nature of their business and their R&D activities.
We recommend that companies periodically review their record-keeping processes (with reference to the fact-sheet) to ensure that all R&D activities and associated expenditures can be appropriately supported.
If you have any concerns about your internal R&D documentation or record-keeping processes please contact BSI at any time.
Timing Issues for Prospective Grants
Beyond the R&D Tax Incentive, there are a wide range of competitive, prospective grants available to companies looking to develop or commercialise innovative technologies, goods and services. Some of the most notable (and valuable) are Accelerating Commercialisation grants, CRC-Projects grants, Industry Growth Centres, ARENA and ARC Linkage Projects.
Grant funding applications typically require a higher level of supporting documentation, and may involve long lead times (3-4 months+) before an award decision is made. For this reason, upcoming State and Federal elections create a risk that some programmes will be placed on hold, or even closed, where there is a change of government. If you are currently considering available grant opportunities, please contact us to discuss the best approach to preparing applications in this environment.
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