Good news and bad for R&D tax
Arthur Sinodinos: Is still looking at the Review of the R&D Tax Incentive
If you are a company that has claimed taxpayer support for software development via the R&D Tax Incentive in the past several years, there is both good news and bad in relation to the scheme.
The bad news is that you almost certainly won’t be able to make the same claim this year and expect the same support. That ship has sailed; the Taxpayer Alert issued by the ATO in late February has dramatically ‘clarified’ – tightened – the eligibility requirements for the scheme.
The good news is that the ATO has not allocated additional compliance resources toward managing the integrity of the program. If you have claimed benefits for software development activity since 2011 and you have not been audited, then touch wood and move on.
Which is to say the government is not sending an army of auditors – or Robo-Auditors – into the industry to claw back ‘over-payments’ that have been under the scheme.
So if you are a small company that is scrambling to fill a $100,000 hole in your budget that you thought was coming from the R&D Tax Incentive, you can at least comfort yourself that it’s unlikely you will be asked to pay back the same $100,000 you successfully claimed in previous years using the same self-assessment criteria.
See? A Silver Lining right there.
We live in strange times, this is for sure. And the Taxpayer Advice issued by the ATO on eligibility requirements for the R&D Tax Scheme is certainly one of those things that make you go ‘Hmmm’.
There are genuinely weird process issues at work here, and you have to wonder at what the intended outcome of the advice on software activity is.
Because the effect of the advice – intended or otherwise – will be to turn off a sizeable tap of government support to software development in Australia.
This is going to drive people crazy, but there is a process issue here that is worth noting.
We have a government that has doggedly put itself through a world of political hurt for its blunt-force approach to clawing back overpayments from welfare recipients who have claimed support to which they were not entitled through the self-assessment process of the welfare support scheme.
In fact, Centrelink and the ATO invested heavily – to the tune of tens of millions of dollars – in building an automated system that would more efficiently hunt these down and force them to repay the money.
At a time when the political imperative is to return the budget to surplus, the short term political pain – blowback from young people and the poor – is worth the hundreds of millions of dollars that will be returned to the Treasury coffers.
This is not the case with tax advice. In the series of tax alerts last month, the ATO identified a series of high risk sectors (agriculture was one, building and construction another), as well as high risk activities (software development).
When the ATO talks about high risk, they are talking about fraud. And what they are saying is that the self-assessments of software development activity by Australian companies carry a high proportion of fraudulent claims.
The ‘alerts’ – or advice if you prefer – is the ATO’s polite way of asking accountants and tax advisers to please stop taking money to which they are not entitled. But there’s no talk of heavy-handed, blunt-force compliance measures, despite the potentially hundreds of millions in savings that could be delivered to the budget bottom line.
I am not advocating heavy-handed audits for the industry. The point is just by-the-by.
But if the intended effect of the tax advice about software development activity is to put the frighteners on small companies – many of them startups – then it has worked.
The advice is loud and clear. Government can say as many times as it likes that “nothing has changed” – but the effect of the advice will be to dramatically tighten the R&D Tax Incentive.
So what’s going to replace it?
The R&D Tax Incentive is the biggest single program in government in support of innovation in Australia. It is an ongoing centrepiece of Australian industry policy.
It is also the most accessed support program by the software sector and by the many, many tech-enabled startups that are supposed to be a strategic target of the National Innovation and Science Agenda.
We know that the R&D Tax Incentive is not operating as effectively as its cost warrants. The review of the system by Bill Ferris, Alan Finkel and John Fraser makes this plain. The review was handed to government last April with a bunch of recommendations for improving the effectiveness of the scheme.
Last April was (let me count) two Industry Ministers ago. No wait, it was three minsters ago. In any case, Christopher Pyne was minister at the time. The government has still not responded to its recommendations.
Minister Greg Hunt had said the formal response would be delivered in the first quarter of this year as part of a package of measures as Phase Two of the National Innovation and Science Agenda. But he’s now gone. And the new Minister Arthur Sinodinos is still getting his feet under the desk.
Which brings me to my very long-winded point. There is a process issue here. A very senior review of a critically important industry policy has taken place. It has made recommendations for making that scheme more effective and providing better value for money to taxpayers.
And yet the dramatic and substantial changes to the workings of the scheme is being carried out via an under-the-radar piece of tax advice drawn up at committee level within an agency.
This is supposed to be a part of the government’s flagship agenda.
What’s going on?