Denham Sadler
February 6, 2019

Outsourcing the R&D crackdown

R&D scheme

Outsourcing the R&D crackdown

Request for tender: "Assist with program integrity functions for the research and development tax incentive (RDTI) program."

The federal government is looking to outsource some of its controversial crackdown on research and development tax incentive claims, with a tender issued for “program integrity support”.

The Department of Industry, Innovation and Science has put out a call for expressions of interest for a supplier to “assist with program integrity functions for the research and development tax incentive (RDTI) program”.

The role would involve helping to assess whether companies receiving the tax break are actually performing eligible research and development activities.

It follows an announcement in last year’s budget that the government would look to “better target the program and improve its integrity”. As part of this crackdown, the Department of Industry, Innovation and Science received $4.4 million over four years, including $1.5 million in the 2019-20 financial year, to “undertake greater enforcement activity and provide improved program guidance to participants”.

Roy Green, Special Innovation Adviser at University of Technology Sydney and chair of the UTS Innovation Council, finds the apparent move to outsource this role to a private contractor troubling.

“It’s puzzling to me why the Department would outsource a core public service function of this nature. Is this due to a lack of internal resources? If so, it is another sad reflection of the hollowing out of public service expertise,” Professor Green told InnovationAus.com.

A Department of Innovation spokesperson confirmed the successful supplier will be vetting RDTI claims for the government.

“The Department, in joint administration with the ATO, undertakes, and will continue to undertake, program administration and integrity functions for the RDTI,” the spokesperson told InnovationAus.com. “To deliver the greatest benefit to program participants and ensure these measures are delivered in the most efficient way, some activities will be undertaken by an external provider with the relevant expertise and skills.”

“The reform includes amendments to the legislation as well as administrative measures to improve and expand program guidance, education and compliance. Improved guidance and education will provide clarification to companies on the eligibility of their R&D activities and improved compliance will support program integrity.”

The definition of eligible R&D activities is included in government legislation, and companies self-assess whether their work fits into it.

The definition is for “experimental activities whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that is based on principles of established science and proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions”.

Responsibility for auditing these claims is shared between the Department and the Australian Taxation Office.

The new tender issued by the Department is for assistance with assessing registrants for the RDTI, along with advice to the government on “risks across the program”.

The tenderer will need to “understand, interpret and apply legislation to a variety of industry sectors”, assess risk, prepare reports on the program and “provide robust, defensible and salient advice” to the department.

An initial contract of 12 months is on offer, with an option to extend.

Although the successful applicant will assess applications from a range of different sectors, it seems likely that the focus will be on software claims. The ATO and Department have been cracking down on software claims for the RDTI for several years, and issued a taxpayer alert in early 2017 saying it was “reviewing arrangements for companies claiming RDTI on software development projects”.

The news is likely to stoke further fears in the tech and startup sectors that they will be faced with more scrutiny and audits.

Representative body StartupAUS has warned of the financial impacts of this on early-stage tech companies. StartupAUS has called for software companies with annual turnover of less than $20 million to be exempt from audits, so long as their claims are similar to others, no more than 50 percent larger than previous years and developed by a specialist R&D advisor.

“There’s a need for software companies to have some confidence that they’re not going to be targeted by the audit process so long as they’re submitting reasonable claims based on best advice and acting in good faith,” StartupAUS CEO Alex McCauley said. 

The outsourcing could also prove troublesome, Professor Green said, with applicants being likely to also provide advice to companies on the RDTI.

“There is also the danger of conflicts of interest arising if those selected to assess applicants also provide a service to applicants themselves,” he said.

The crackdown on RDTI claims comes as a senate committee report on the government’s legislative changes to the scheme is set to be released. The government plans to cut $2.4 billion from the scheme over four years through a range of new measures and changes, which have shocked and angered the tech community.

The increased compliance costs, both for government and companies, demonstrate that direct funding methods are required to spur research and development in Australia, he said.

“The point is that indirect funding schemes of this kind are not as cost effective as some might imagine. They have major administrative costs both for applicants and in the assessment of process, particularly when they become as complex as the RDTI,” Professor Green said.

“Again we see demonstrated the wisdom of the Innovation and Science Australia recommendation to shift public resources from indirect schemes to direct targeted funding, as we find elsewhere among advanced economies.”

ISA’s 2030 report recommended that the government ensure that at a minimum, support for science, research and innovation does not fall below its medium-term average of 0.63 percent of gross domestic product, and that it focuses on more direct funding mechanisms.

The overall $2.4 billion cut from the RDTI will not be reinjected into other research and development-focused programs, much to the chagrin of the tech sector.

“What the business and research communities would like to hear from both government and Opposition is how they plan to restore the $2.4 billion cut to RDTI, let alone the other massive cuts since 2013 to the national innovation system,” Professor Green said. 

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