The ATO’s plan to deny R&D tax incentive claims on JobKeeper wages means companies may be forced to make further retrospective changes to their tax returns, leading to concerns the scheme is becoming too complex and uncertain.
The Australian Taxation Office (ATO) released a draft determination this week ruling that companies would be unable to make research and development tax incentive (RDTI) claims on wages paid through the federal government’s JobKeeper wage subsidy.
This is due to the ATO’s provisional ruling that the JobKeeper payment is not “at-risk expenditure” as companies could reasonably expect to receive it if the R&D activity was conducted or not.
While the ATO is to consult with industry on this decision for the next month, it has said that the final decision would be applied to claims made in the 2019-20 financial year.
Along with the planned major changes to the RDTI, amounting to a $1.8 billion cut to the scheme, which will be applied retrospectively if they are passed by Parliament later this year, companies trying to access the scheme for the last financial year will be doing so under a cloud of uncertainty and complexity.
For most companies not in the manufacturing sector, salaries and staff time is the biggest aspect of claims made under the RDTI. The draft ruling is likely to most impact smaller firms that may have already lodged their tax return, and companies conducting pure R&D such as software development in-house.
Independent RDTI advisor Jeremy Worthington, who previously worked in KPMG and PwC’s R&D divisions, has written to the ATO to dispute the draft determination.
“Their argument is that a company can look forward and reasonably expect to receive some of that money back from the government, but that seems at odds with most companies applying for JobKeeper, especially in the early days,” Mr Worthington told InnovationAus.
“I don’t think the at-risk argument actually holds in the case of JobKeeper. If I’ve been receiving it for a couple of months and am confident I’m doing it right and haven’t had the benefit withdrawn, then I could reasonably expect I’d continue to receive it. But to retrospectively be applying it to FY20, that feels like overreach from the ATO.”
If the ATO goes ahead with this decision, it will be the second thing that companies accessing the RDTI may need to amend retrospectively in their tax return.
Legislation currently before the Senate makes a series of significant reforms to the scheme, including a new $4 million cap for smaller firms and a new “intensity measure” to calculate the size of the offset for larger companies.
The legislation will be debated in Parliament again later this year after a Senate committee delivers a report on the bill next month.
But if it is eventually passed by Parliament, the government has flagged that it will be applied retrospectively, meaning that any company accessing the scheme that files their tax return before the bill is passed may have to amend their scheme and see their refund clawed back.
Industry department figures showed that nearly 30 per cent of companies registered for the RDTI by September last year.
If this statistic holds for this year, then a third of all companies accessing the RDTI may have to amend their return and lose some of its refund due to two retrospective changes.
This level of uncertainty is damaging the scheme and making it difficult for claimants, especially smaller firms, Mr Worthington said.
“There are a whole series of caveats now. Small businesses want to put in returns early so they get the tax back, so to come in later on and say that sometime in September we might change the rules for the tax returns already put in and make you change them, that seems disingenuous,” he said.
“It’s one thing to say for FY21 these are the rules, it’s another to say that you’ve submitted already but you’ll have to change them because we changed our minds after the fact. I’ve seen a couple of companies say that it’s just too hard so it’s not worth participating.”
This level of complexity and uncertainty is leading some companies to decide to not try to access to R&D refund at all, he said.
“Small companies should be able to self-assess, they should be able to make their own calculations, but it’s too complicated that they just can’t. They need to pay for proper advice which is not fair for smaller companies. They shouldn’t have to pay professionals thousands of dollars to get a small proportion right in their tax return,” Mr Worthington said.
“By making it more complicated and more uncertain they need to have professional advice and that means they incur costs, and they still might have to change their tax return later. A couple of companies have put their pens down and said it’s too difficult and too expensive and chosen not to participate.
“That’s a real shame. Those companies are doing genuine R&D and genuine expenditure, but they can’t go through the bureaucracy of getting it right.”
The ATO will accept comments on its draft determination regarding the RDTI and JobKeeper until 24 August.