Australia’s small business ombudsman Kate Carnell has lashed the administration of the research and development incentive, handing down a report that labels the scheme untimely, inconsistent and having had a “devastating impact” on many companies it was put in place to help.
The Australian Small Business and Family Enterprise Ombudsman yesterday released its review of the R&D Tax Incentive program together with a compendium of 24 detailed recommended changed to the program.
The 24 recommendations cover four key areas where the ombudsman says the RDTI needs to be overhauled:
- Where compliance audits are necessary they should take place as close as possible to the first year of registration of a project;
Guidance material must be comprehensive, clearer and update, and should be developed in consultation with business;
Record-keeping requirements should be simplified and take into account the commercial practicalities of small businesses;
Small business should be assisted to identify and retain professional and responsible R&D consultants.
Ms Carnell details how small businesses – including startups – have been subjected to reviews and audits by the ATO and AusIndustry as the two delivery agencies, often at the same time. In each case, the compliance activity took place retrospectively and had taken place several years after the R&D had been undertaken and after the RDTI program’s refund had been received.
In almost all of these case, the RDTI claims were rejected in total, and the business put under extreme duress and put the viability of the companies at risk or worse.
“This has had a devastating impact on the companies, with some saying they face financial ruin. Others have scaled down their R&D efforts in Australia and reduced their R&D staff,” Ms Carnell says in the report.
“For small business, particularly startups, cash-flow is critical and access to finance can be challenging. Small businesses undertaking R&D rely on the R&DTI to help fund the development of their innovative new products and services, particularly in the often unprofitable early years,” she said.
“It is therefore critical that wherever possible the program is improved for small and family businesses and that R&DTI risk and compliance activities are conducted as close as possible to when they register their R&D activities and before they claim the benefit with the ATO.”
The report found there had been a shift in the interpretation of the RDTI legislation, narrowing the focus and leading to more claims being rejected, particularly in the area of software innovation.
The primary concern was the apparent shifting of the goalposts in relation to the scheme, and uncertainty about what constituted a viable claim. This was particularly the case in relation to software development.
BDO tax partner Nicola Purser said the Ombudsman’s finding aligned with BDO’s experience, particularly in relation to startups.
The report recognised that administrative problems with the program had made it overly complex and that companies had been misled in relation to assessing R&D eligibility and expenditure eligibility, sometime resulting in adverse retrospective assessments dating back several years.
“The Ombudsman has highlighted the need for administrative clarity as to legislative interpretation, particularly in the proper assessment of software development claims, along with the need for better education of AusIndustry and the ATO and the adoption of a more practical approach to their administrative role,” Ms Purser said.
“The changes recommended by the report are sensible and match the purpose of the R&D Tax Incentive – to incentivise companies to undertake R&D activities in Australia
“These reforms should be implemented as soon as possible to provide companies with reassurance when making their investment decisions, and certainty on the administration of the program.”
Kate Carnell said that both the Australian Taxation Office and AusIndustry had told the review that they were revising their approach to RDTI compliance.
The first two recommendations of the review called for the ATO and AusIndustry administration of the scheme to be “seamlessly integrated”. It has also recommended that all ATO and AusIndustry guidance be provided jointly and properly maintained.
She also wants companies that have been adversely impacted by claims unfairly rejected to have a way to seek redress.
“It is important that the improvements are implemented quickly and applied consistently throughout the networks of both agencies,” Ms Carnell said.
“It is also critical that there is a mechanism by which those businesses adversely affected by past poor processes can seek redress,” she said.