Retrospective RDTI changes ‘simply unfair’


Denham Sadler
Senior Reporter

A government plan to apply its highly contentious changes to the R&D tax incentive retrospectively is “simply unfair” and “opportunistic” and will damage early-stage companies, a Senate committee has been told.

If passed by Parliament, the significant reforms to the research and development tax incentive (RDTI) – amounting to a $1.8 billion cut – would be applied for the current 2019-20 financial year.

A number of submissions to the Senate Economics Legislation Committee, which is conducting an inquiry into the changes, raised concerns with the retrospective nature of the changes, with companies having already launched major projects based on the current RDTI rules.

The changes to the RDTI were first flagged in the 2018 budget, and the Coalition attempted to pass them through Parliament early last year, but this was stymied but the same senate committee.

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Applying R&D Tax changes retrospectively ‘unfair’

The legislation was reintroduced to Parliament late last year and quickly referred back to the Senate Economics Legislation Committee.

Despite some minor tweaks, the changes are largely the same as first announced: an increase of the expenditure threshold to $150 million, a $4 million cap for smaller companies and the introduction of an intensity measure to calculate the tax offset for larger firms.

The new bill does push back the start time of the changes to the 2019-20 financial year, but this makes them still retrospective.

The Australian Small Business and Family Enterprise Ombudsman, which conducted a review of the RDTI scheme last year that included 24 recommendations to government, said the changes should not apply until the next financial year.

“This would avoid any retrospective effect that the bill might otherwise have. Additional time is necessary to allow for clear guidance material to be developed and effectively disseminated by both agencies, and for SMEs to take technical accounting advice in order to plan appropriately and ensure compliance,” the Ombudsman said in a submission to the senate committee.

The federal government has claimed that Australian businesses have been aware of the changes since they were flagged in draft legislation in late 2018, but in its submission RnD 360 Advisory Group argued this was disingenuous.

“The federal government’s statement that companies had been forewarned of the current re-elected government’s intent to implement the proposed changes, and therefore that all companies should have planned for them to come into effect from 1 July 2019 is weak, and opportunistic, but also simply unfair,” the RDTI advisory group said.

“At the time of the federal election in May 2019, industry held the very reasonable expectation based on the outcomes of the Senate review of February 2019 that substantive changes would be required and made to what was proposed, to clearly address what most saw as flawed changes.

“R&D spending decisions in FY20 have been made with the reasonable expectation that these issues would have been favourably redressed, even with the government being re-elected,” it said.

“If the government proceeds with what has been proposed, at the very least, the first income year that they should apply to, should be the first income year commencing after the law changes.”

CPA Australia also raised concerns with the changes being applied retrospectively in a separate submission to the committee.

“Given that many R&D projects take years to undertake, the 1 July 2019 start date is problematic for affected claimants who cannot shift or cease activities. We suggest that active projects be grandfathered, or some form of consideration is given to businesses who are dependent on the RDTI in its existing form to compete R&D,” the submission said.

“Taxpayers and their advisors cannot operate based on announcements or exposure drafts but rather the bill as passed by both Houses of Parliament. Backdated changes have a particularly large impact on RDTI recipients due to the requirement to retrospectively amend tax returns and repay monies.

“Companies are currently submitted RDTI claims for the 2019 income year and have already undertaken eight months of their 2020 income year R&D activities. Their expenditures have been based on the existing form of the RDTI.

“If the bill is passed, many claims are likely to require amendment with the impact being particularly damaging for smaller companies receiving refundable offsets to support cashflow.”

The previous Senate inquiry was also told of similar concerns, with the original changes set to come into effect from the 2018-19 financial year. In its final report, the committee acknowledged these issues but did not recommend that the changes not be applied retrospectively.

“Some R&D entities affected by the bill have expressed concerns that the retrospective application of the bill will disrupt current and future investments in R&D activities that have already been scheduled, particularly noting that there are often long lag times in developing R&D initiatives,” the Senate committee said in February last year.

“The committee is also cognisant that governments, in ensuring accountability of taxpayer funds, need to constantly monitor, examine and strengthen such programs and industry as partners in such schemes also need to remain alert to the need for improvements.”

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