R&D tax audits are killing startups
Prof Roy Green: The R&D Tax Incentive scheme needs a massive re-think
The Commonwealth’s flagship R&D Tax Incentive program is too complex and difficult for smaller companies – a proposition underlined by the $200 million in clawbacks last year from companies that had accessed the scheme, ecosystem expert Professor Roy Green says.
Government has confirmed that it had doubled the number of compliance checks on companies that had accessed the R&D Tax concession, compounding the fears of startups and smaller companies that they are unfairly targeted by audits in an expensive and time-consuming process.
The figures are found in documents prepared by the Australian Taxation Office for a Senate estimates hearing earlier this year and released under an AFR Freedom of Information request. They reveal that about $200 million was clawed back from companies accessing the research and development tax incentive (RDTI) through compliance checks in 2017-18.
This equates to about 2.1 per cent of the more than 13,000 RDTI claims being checked by the ATO and industry department.
This is up from the 1.3 per cent of companies audited in 2016-17, with $115 million recovered from 170 companies, while 2015-16 saw only 80 activities checked with $185 million in liabilities discovered.
The costs and time associating with complying with these audits could be damaging to early-stage tech companies, Professor Green said.
“The ATO clawback of RDTI payments is a clear demonstration that the scheme has become too complex for many businesses, especially the startup sector,” Professor Green told InnovationAus.com.
“No-one would argue that the scheme should fund ‘business as usual’ applications, but nor should the costs of compliance outweigh the benefits of participation,” he said.
The RDTI is a self-assessed and self-registered scheme, but the ATO can identify companies to review for compliance activities through a “range of risk filters”, the document said, including tax returns, R&D schedule and other data.
“We have a robust high risk refund process to identify ‘at risk’ claims before refunds are paid. We seek to complete our review activities as quickly as possible to not hold up refund payments,” the ATO said in the documents.
The figures confirm concerns in the tech sector that the number of claims being put under the microscope have sharply increased, StartupAus chief executive Alex McCauley said.
“Right now the scheme’s application for software companies is unfair, and the results are disastrous – the rug is being pulled out from under promising young companies at a critical time for the sector and the economy,” Mr McCauley told InnovationAus.com.
“It’s important that the program’s costs aren’t allowed to blow-out because of rorting. Integrity is critical to keep the scheme viable for legitimate claimants," he said.
"But it’s also critical that we have consistency from year to year in the way the scheme is applied, especially given the retrospective nature of these audits."
StartupAus is looking to discuss the issue with newly re-appointed industry minister Karen Andrews.
“I’ve been really encouraged in the last few days to see Karen Andrews reopen the discussion about solutions to this problem, and we’ll be working hard with both industry and government to help get things back under control,” Mr McCauley said.
The documents reveal that the ATO view software claims under the RDTI as an “area of concern”.
In the last financial year, the ATO undertook 151 “high risk refund reviews”, with about a third of these still being paid in full, a third being partially adjusted and the remaining third being fully disallowed.
Of the disallowed refunds, most were due to a lack of substantiating evidence of the expenditure related to the claim, or the actual activity not being eligible for the scheme.
The ATO tries to work with early-stage companies that may be unable to repay a tax refund if it was later determined to be ineligible, the documents said.
“We work with companies that have debts raised against them through our compliance activities, including where a company may be experiencing cash flow issues. The ATO’s approach to debt is to ensure all taxpayers meet their payment obligations on time and address any debts that arise as early as possible while they are manageable,” it said.
“We understand that taxpayers may occasionally experience short-term cash flow issues that prevent them from paying on time. It becomes more difficult to resolve debts as it gets older, and we encourage businesses to engage with us early so we can talk through their individual circumstances and discuss tailored options.”
There has been a greater focus on tech companies accessing the scheme since the ATO issued a taxpayer alert in 2017 saying that it was “reviewing arrangements for companies claiming RDTI on software development projects”.
Further guidelines have since been released clarifying what software activities are eligible for the scheme and what documentation needs to be kept by startups.
StartupAus has pushed for companies with annual turnover of less than $20 million to be exempt from these audits if their claims are similar to others, not more than 50 per cent larger than previous years, and developed by a specialist R&D adviser.
The documents also confirmed that the total value of claims through the scheme has dropped from $6.1 billion in 2016-17 to $5.4 billion in 2017-18, due to a drop in refunds to companies with annual turnover of more than $20 million.
In the last financial year, 11,402 claims were made under the refundable tax offset part of the scheme - for the smaller companies, - with $2.5 billion paid. This figure is in line with the previous two years.
For larger companies, there were 1,754 claims, with $2.9 billion paid out, a figure that is down nearly 20 percent year-on-year.
The ATO and industry department were allocated $4.4 million over four years in last year’s budget to “undertake greater enforcement activity and provide improved program guidance to participants”.
It has opted to outsource some of this crackdown, issuing a tender earlier this year for “program integrity support”, with an external party to help to assess whether claimed activities are actually eligible for the RDTI.
Planned amendments, which would cut $2.4 billion from the scheme, stalled in Parliament earlier this year after a government-led senate committee passed them back to the drawing board.
While the Coalition is yet to confirm whether it will still be going ahead with the changes, it revealed a further $1.35 billion would be cut from the scheme over the forward estimates.
Professor Green said it’s now time to reconsider the RDTI, and look towards more direct funding mechanisms.
“There is now a compelling case to revisit the recommendation of the ISA 2030 report to rebalance R&D support from indirect tax incentives to direct targeted funding for defined objectives, as is the case in most other advanced economies,” he said.