James Riley
August 30, 2019

ATO clawbacks on R&D tax reviewed

R&D Tax

ATO clawbacks on R&D tax reviewed

Kate Carnell: Complaints about unfair treatment by the ATO and AusIndustry

Small business ombudsman Kate Carnell has launched an investigation of the Australian Tax Office enforcement of the R&D Tax Incentive, and in particular the reported clawback of $200 million in the 2018 financial year from companies that had made claims under the scheme.

Ms Carnell, who is the Australian Small Business and Family Enterprise Ombudsman, said her office had received complaints from small business about unfair treatment by the ATO and AusIndustry in relation to R&D tax incentive claims.

She said her office was reviewing the impact of the ATO policy and enforcement practices, and in particular claims by small business that the Tax Office and AusIndustry were applying a more rigid re-interpretation of the laws regarding the eligibility of software claims.

“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,” Ms Carnell said.

“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,” she said.

“Most of these businesses were genuine in their belief they were undertaking R&D and that their claims were totally justified.”

The tightening of the RDTI has had a particular impact on local startups, prompting former Innovation and Science Australia board member and AirTree Ventures co-founder Daniel Petre earlier this month to call government’s treatment of tech companies “appalling”.

Industry Minister Karen Andrews has engaged with industry through a series of stakeholder roundtables since the election where the administration of the R&D tax incentive has been raised as an issue, particularly among startups.

“My department is working with businesses including start-ups, to review and continuously improve the administration of the R&D Tax Incentive,” Ms Andrews told InnovationAus.com.

“I am engaging with stakeholders through a series of roundtables to understand their challenges and opportunities in a number of areas, including administration of the R&D Tax Incentive,” she said.

The RDTI has been a vexed issue for government since a Bill Ferris-led 2016 review of the scheme. While the review retained an existing definition of what constitutes R&D, later explanatory memoranda issued by AusIndustry and ATO appears to have led to a tightening of how the definition is applied in practice.

A Senate inquiry into the R&D Tax Incentive reform legislation, while acknowledging the need to reform the program, did not dispute the retention of the existing definition.

The government is now considering the Senate inquiry’s recommendation ahead of any reintroduction of legislation to reform the program.

StartupAus chief operating officer Alex Gruszka called the news of the small business ombudsman’s intervention as “deeply welcome” and that the organisation had consistently warned of a cut by stealth to the R&DTI, in particular surrounding the interpretation of what constitutes R&D under the scheme.

The result had been a reduction in R&D support going where it is best deployed, at the cutting edge of Australian technology, Mr Gruszka told InnovationAus.com.

“At the same time, audits under the clawback initiative have jeopardised those businesses that acted in good faith in prior years by requiring them to return grants that have already been received and spent on the businesses – an existential risk for many cash-poor startups,” he said.

“Having the Ombudsman note the same issues we are hearing on the ground from industry is a validation of those concerns and we look forward to its investigative report's release.

“We note there has been some movement from the government on this issue since the election, in particular from Minister Andrews, and would expect that the Ombudsman's work should serve to justify and accelerate her efforts.”

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