Bills Digest no. 165 2009–10
Tax Laws Amendment (Research and Development) Bill
2010
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage history
Purpose
Background
Financial implications
Main provisions
Concluding comments
Contact officer & copyright details
Passage history
Tax Laws
Amendment (Research and Development) Bill 2010
Date introduced: 13
May 2010
House: House of
Representatives
Portfolio: Treasury
Commencement: Sections 1 to 3 and anything in this Act not
elsewhere covered commence on Royal Assent. Schedules 1, 2, 4 and
Parts 1 to 4 and Part 6 of Schedule 3 commence on Royal Assent.
Part 5, Division 1 of Schedule 3 commences on the later of the
start of the day of Royal Assent or the commencement of Schedule 2
to the Tax Laws Amendment (Transfer of Provisions) Act
2010, or not at all if that Act is not passed.[1] Part 5, Division 2 of
Schedule 3 commences on Royal Assent, or not at all if the Tax
Laws Amendment (Transfer of Provisions) Act is not
passed.
Links: The
links to the Bill, its Explanatory Memorandum and second
reading speech can be found on the Bills page, which is at http://www.aph.gov.au/bills/.
When Bills have been passed they can be found at ComLaw, which is
at http://www.comlaw.gov.au/.
The Tax Laws Amendment (Research and
Development) Bill 2010 (the Bill) proposes to establish the
framework for a new research and development (R&D) tax
incentive in the Income Tax Assessment Act 1997 (ITAA
1997) and to repeal the provisions of the existing incentive
currently contained in the Income Tax Assessment Act 1936
(ITAA 1936).[2]
The following sections provide a general outline of the existing
and proposed R&D tax measures and include a worked example of
how the two would operate in relation to a particular
circumstance.
More detail on the major definitional and policy differences
between the two measures are discussed in the ‘key
issues’ section of this Digest.
The existing incentive consists of four elements:
- the basic 125 per cent tax concession
- the 175 per cent premium concession[3]
- the 175 per cent international premium concession[4], and
- the refundable R&D tax offset for small companies.
The concession elements of the existing incentive are enhanced
tax deductions which reduce the taxpayer’s taxable income by
increasing[5] the
amount it can claim as a deduction for R&D expenditure.[6] Companies with a turnover
of less than $5 million[7] can claim a refundable R&D tax offset instead of a
deduction.
The existing incentive has undergone several changes since its
introduction in 1986.[8]
The term ‘research and development
activities’ is defined broadly in the ITAA 1936, the
threshold requirement being that eligible activities involve either
innovation or high levels of technical risk.[9]
Around 8000 businesses are currently registered for the existing
incentive.[10]
The cost of the current incentive for the current financial year
has been estimated to be around $1.5 billion.[11]
The proposed new incentive is included as part of a suite of
measures designed to stimulate productivity growth and
innovation.[12] The
objects clause of the Bill refers to encouraging R&D activities
that might not otherwise be conducted but where the knowledge
gained is ‘likely to benefit the wider Australian
economy.’[13] This is known generally as
‘spillover’, although the term is not used in the Bill
or the Explanatory Memorandum.
The proposed new incentive replaces the existing incentive, and
comprises two main components:
- a 45 per cent refundable tax credit for eligible entities with
a turnover of less than $20 million, and
- a 40 per cent non-refundable tax credit for all other eligible
entities.
The incentive is available for expenditure on
eligible research activities or for the decline in value of
depreciating assets used for eligible research activities.[14]
The 45 per cent refundable tax credit is equivalent to a 150 per
cent tax deduction, and doubles the current base incentive for
smaller entities to expend money on R&D. Because the 45
per cent credit is refundable, eligible entities can access the
incentive as a cash refund when submitting their tax returns. The
Government anticipates that 5500 small firms could benefit from the
incentive.[15]
The 40 per cent non-refundable tax credit is equivalent to a 133
per cent tax deduction, and raises the current base incentive for
larger entities by one third.[16] The incentive is also open to international
entities which hold relevant intellectual property
offshore.
Whereas the value of the existing incentive is determined by
multiplying the value of the concession by the company income tax
rate, the proposed new incentive is decoupled from the company
income tax rate due to its offering a tax offset calculated by
reference to the value of the qualifying expenditure.
The proposed new incentive distinguishes between
‘core’ and ‘supporting’ R&D.
Eligible expenditure under both categories qualifies for a
tax credit under the proposed new incentive. The Bill sets
out several definitions and tests (mostly distinct from those in
the existing concession) to determine whether a given activity
qualifies for the incentive. The purpose of these tests is to
ensure that the incentive is directed towards scientific research
and away from such activities as industrial development with an
element of novelty.
The proposed new incentive is intended to stimulate more
companies, particularly smaller companies (sometimes described as
small to medium enterprises or SMEs), to undertake R&D
activities.
The Explanatory Memorandum contains a series of worked examples
illustrating how aspects of the proposed new incentive would
operate.
In example 1.1[17], Green Light manufactures outdoor lighting and has a
turnover of $5m, which qualifies it for the 45 per cent refundable
tax offset under the proposed new incentive. In a given tax
year, Green Light incurs $1m of eligible expenditure.
Under the existing incentive as per the worked example, Green
Light could claim a refundable tax offset of $375 000:
Grossed-up value of offset for eligible expenditure (standard
full deduction plus 25 per cent base offset) $1
250 000
Reduction in tax liability (at 30 per cent tax
rate)
$ 375 000
Advantage
$ 375 000
By comparison, under the proposed new incentive Green Light
would receive a refundable tax offset of $450 000:
Value of eligible
expenditure
$1 000 000
Multiplied by the value of the credit (45 per
cent)
$ 450 000
Advantage (as credit or cash
refund)
$ 450 000
This example also illustrates how the proposed new incentive is
decoupled from the corporate tax rate. Whilst a reduction in
the corporate tax rate would reduce the amount of assistance under
the existing incentive, the amount of assistance under the proposed
new incentive would remain static.
On 9 March 2007, the Productivity Commission released its
research report, Public Support for Science and Innovation
(the Productivity Commission report).[18] In relation to the existing
incentive, the key findings of the Productivity Commission report
were that the criteria for the basic 125 per cent tax concession do
not screen out R&D which would have happened anyway, that the
benefits of the existing incentive are not large and could in fact
be negative,[19]
and that the net payoff from the concession could be substantially
improved by maintaining the access to the concession for small
entities only.[20]
The Productivity Commission report recommended several changes
to the design of the then existing incentive including:
- restricting access to the basic 125 per cent R&D tax
concession to small entities (finding 10.5)
- maintaining the 175 per cent premium R&D tax concession for
both small and large entities (finding 10.6), and
- narrowing the criteria for eligible R&D requiring that
eligible activity be both highly innovative and involve
high levels of technical risk, in line with the Frascati
Manual[21] rather than the criteria in
the existing incentive that eligible R&D be either innovative
or highly risky.
The Productivity Commission acknowledged that restricting the
scope of the concession would increase administrative and
compliance costs, and that unforeseen consequences would likely
arise.[22]
On 22 January 2008, Senator Kim Carr announced a review of
Australia’s national innovation system, to be conducted by an
expert panel chaired by Dr Terry Cutler. The report of the review,
Venturous Australia - building strength in innovation, was
released on 29 August 2008.[23] Relevant findings of the Cutler review
were:
- that the existing incentive should be changed from a tax
deduction to a tax credit (recommendation 8.2)
- that a 40 per cent tax credit should be available to large
entities and a refundable 50 per cent tax credit should
available to smaller entities with an annual turnover of under $50
million (recommendation 8.3)
- that all R&D undertaken in Australia which meets the
relevant definitions be eligible for the tax credit (recommendation
8.4), and
- that R&D expenditure undertaken in Australia by foreign
owned entities be eligible for the 40 per cent tax credit
(recommendation 8.6)
Released on 12 May 2009, Powering Ideas: An Innovation
Agenda for the 21st Century (Powering
Ideas)[24] is the
Government’s response to the Cutler review. It contains the
Rudd Government’s long-term innovation policy agenda. The
Government accepted the tenor of the findings of the Cutler review
and announced the proposed new incentive and the repeal of the
existing incentive. The proposed new incentive was included as a
measure in the 2010–11 Budget.[25] In announcing its response, Senator
Carr stated that:
.... the new R&D Tax Credit will better
reflect the financial realities facing many businesses during the
global recession. It will help ensure that Australian
businesses are well placed to take full advantage of generous
incentives to innovate during the global recovery.
......
Under the new Tax Credit system, eligibility
criteria will be tightened to make sure that our investment is
getting the best results – supporting only genuine
R&D. This will provide offsetting savings to fund
improvements to the system. [26]
On 18 September 2009 the Government issued a consultation paper
on the Bill, Treasury receiving 197 submissions in
response.[27]
The First Exposure Draft of the Bill was issued on 18 December
2009, with the Treasury receiving 131 submissions.[28] Many submissions to both
exercises raised practical concerns about the operation and effect
of the proposed new incentive, and several identified drafting
errors.
The main concerns outlined in submissions were that:
- the proposed new definition of ‘core R&D
activity’ would exclude many categories of business R&D
such as prototyping, construction of pilot industrial plants and
production-based trials
- the proposed distinction between ‘core’ and
‘supporting’ R&D activities would result in a more
complex and less predictable incentive
- the proposed scheme would impact disproportionately upon
SMEs[29], and
- no modelling of the proposed new incentive had been
released.
The Treasurer, Wayne Swan and the Innovation Minister, Senator
Kim Carr, released the Second Exposure Draft on 31 March 2010.
Treasury received 55 submissions on the Second Exposure Draft, most
of them more supportive than those on the First Exposure Draft, but
generally opposing the proposed changes to the definitions and
tests which apply under the current incentive.[30] Specific concerns raised in the
submissions include:
- that the ‘dominant purpose’[31] test applied in determining eligible
supporting activities[32] is too broad and difficult to apply
- that the definition of ‘core activities’ is too
narrow
- that the issuing of the draft and the call for submissions was
not accompanied by any comparative analysis of the treatment of
R&D activities under the existing R&D incentive as compared
with the new R&D incentive
- that the proposed new incentive would result in greater
administrative complexity
- that the generous ‘guaranteed return to investors’
provisions in the existing incentive[33] has been scrapped in favour
‘expenditure not at risk’ exclusion, which ‘opens
up the potential for changing the R&D tax incentive from a
largely guaranteed upfront concession at the time R&D decisions
are made to an after-the-fact compensation measure for research
that fails’[34]
- concerns that the new incentive adopted only part of an
internationally recognised standard definition of R&D contained
in the Frascati Manual[35]
- that the expansion of AusIndustry’s powers will create
uncertainty, and
- that for certainty in taxpayer planning, the proposed new
incentive should not come into effect any earlier than 1 July
2011.
The following table[36] summarises the Government’s response to key
issues raised in submissions on the Second Exposure Draft, and
resulting changes (if any) to the Bill as introduced:
|
Issue
|
Response
|
|
Concerns about the meaning of ‘new knowledge’ in the
definition of core R&D creating ambiguity
|
The Bill as introduced retains the definition of core R&D
from the Second Exposure Draft
|
|
Concern about the dominant purpose test for eligibility of
supporting R&D activities
|
The Bill as introduced retains the dominant purpose test from
the Second Exposure Draft
|
|
Concern about the scope of the exclusions list
|
The Bill as introduced contains significantly fewer exclusions
than the Second Exposure Draft, given the new stricter tests for
core and supporting R&D activities
|
|
Concern about the planned augmented feedstock rule[37]
|
As per the Second Exposure Draft, the Bill as introduced
maintains a rewritten version of the existing feedstock rule
contained in the ITAA 1936
|
|
Technical flaw in provisions relating to the clawback of
government grants
|
Relevant provisions refined to ensure a more neutral and
equitable outcome
|
On 13 May 2010 the Senate referred the
Bill (and the accompanying Bill) to the Senate Standing Committee
on Economics for inquiry and report by 15 June 2010.[38] The committee
conducted hearings on Thursday 20 May 2010 in Canberra, and on
Friday 21 May 2010 in Sydney. The issues raised by, and the
positions of, persons and entities at these hearings are dealt with
in the next section of this Digest.
At the Canberra hearing of the Senate Committee inquiry on 20
May 2010 the committee heard from witnesses representing the
research-based medicines industry, tax advisory entities, the
university sector, the Treasury, and the Department of
Innovation.
Witnesses from Medicines Australia were strongly supportive of
the proposed new incentive, with minor qualifications about the
complexity of rules relating to core and supporting R&D.
Witnesses from Ernst & Young and taxation advisory firm BDO
repeated concerns aired in theirs and other submissions in relation
to the exposure draft of the Bill, particularly that activities
with both productive output and R&D purposes would not be
eligible under the proposed new ‘dominant purpose’
test, and that this would impact disproportionately on SMEs many of
which, according to evidence given, combine production-related
activities with R&D. A further concern was aired over the
effect of the $20 million turnover threshold for the more generous
45 per cent refundable tax credit, evidence being given that many
SMEs have high turnover but low profitability, and that many
formerly eligible manufacturing sector activities would not attract
any incentive after the passage of the Bill.[39]
Witnesses representing the university sector were somewhat
ambivalent in their evidence, but suggested that should the
proposed new incentive result in less R&D being performed in
Australia this would impact negatively upon the amount of R&D
conducted by universities, and conversely, that a more expansive
definition of eligible R&D would benefit the university
sector.[40]
Witnesses from the Treasury and the Department of Innovation,
Industry, Science and Research offered evidence contrary to that
offered by Ernst & Young and BDO regarding the eligibility of
production activities, citing the examples in the Explanatory
Memorandum.[41]
At the Sydney hearing on 21 May 2010 the committee heard from
witnesses including representatives from the petroleum sector, tax
advisory entities, industry groups, and Innovation Australia.
Witnesses from the Australian Industry Group repeated earlier
concerns about the effect of the dominant purpose test for
supporting R&D, the selected adoption of elements of the
Frascati definition of R&D, and the projected start
date for the new incentive.[42] Witnesses from medical implant firm
Cochlear Ltd were generally supportive of the proposed new
incentive, although cited compliance costs and the effect of the
dominant purpose test as concerns.[43]
Witnesses representing the Advanced Manufacturing
Coalition[44] drew
attention to potential negative consequences for Australian
manufacturers, the main concern being the application of the
dominant purpose test.[45] Witnesses from Innovation Australia[46] were broadly supportive of the
Bill.[47]
Mention was made in the both hearings of the possibility that
the current incentive is subject to rorting.[48] No specific evidence was offered by
witnesses as to whether any alleged rorting was an illegitimate
abuse of the existing incentive or a legitimate exploitation of
existing rules, although Ms Murray, representing taxation advisory
firm BDO, stated her opinion that “there is no doubt that the
majority of R&D concession is held in the hands of very few
claimants.”[49]
The various exposure drafts and the Bill
as introduced have also attracted significant media
attention. In most reports, representatives of and
consultants acting for larger entities have been quoted as opposing
the proposed new incentive. Smaller entities, in particular
biotechnology entities and their representatives, have been quoted
as supporting the Bill.
Some representative comments are as follows:
- an editorial in the Australian Financial
Review speculated that ‘business expenditure on R&D
– which is only half the level of leading nations and 25 per
cent below the OECD average – will plunge after years of
strong growth’[50]
- Michelle Gallagher, representing biotechnology industry body
BioMelbourne Network, was quoted congratulating Canberra ‘on
behalf of the industry’ (on the assumption that eligibility
criteria will not exclude clinical trials)[51]
- Australian Industry Group Chief Executive Heather Ridout was
quoted labelling the proposed new incentive ‘deeply
flawed’ and would ‘significantly reduce’
innovation[52]
- Biotechnology entity AusBioTech was reported as urging the
government to persist with the Bill’s passage[53]
- PricewaterhouseCoopers tax partner, Sandra Mason, was quoted
describing the proposed new incentive as ‘a kick in the guts
for business’[54]
- Amalgamated Metal Workers Union industry advisor, Nixon Apple,
was quoted as saying that ‘if this legislation goes ahead,
this is the end of the Button revolution[55] and it is the end of the innovation
revolution.’[56]
Despite negative comments from Australian representatives of
KPMG in both the press[57] and in submissions[58], a recent report from KPMG’s Canadian
division ranked Australia, on the assumption that the Bill becomes
law, ahead of all other nations with similar incentives already in
place, including Canada, France, Italy and Japan.[59]
Opposition spokesperson on innovation, Sophie Mirabella MP,
suggested the Government should ‘abandon this fundamentally
flawed bill and go back to the drawing board.[60]
Neither the Greens nor independents have publicly articulated a
policy position on the proposed new incentive as far as the writer
is aware. Senator Xenophon participated actively at the
recent Senate Select Committee on Economics hearing in Canberra on
20 May 2010.[61]
Several drafting flaws in the First and Second Exposure drafts
were corrected in the Bill. A Correction to the Explanatory
Memorandum is also available on the Bill’s homepage,
correcting 28 minor drafting errors in the Explanatory
Memorandum.[62]
Assessed on an underlying cash balance, the Government estimates
the effect of the Bill to be revenue neutral over the next four
fiscal years.[63]
The estimated effect on fiscal balance differs from the effect
on underlying cash balance. The fiscal balance recognises
payments under a refundable tax offset in the year in which
qualifying activity occurs, whereas the underlying cash balance
recognises these payments in the following year. The
difference is shown in the following two tables.
1. Fiscal balance estimates for the next four fiscal
years[64]
|
2010–11
|
2011–12
|
2012–13
|
2013–14
|
2014–15
|
|
–$850m
|
$190m
|
–$180m
|
–$110m
|
–$130m
|
2. Underlying cash balance for the next four fiscal
years
|
2010–11
|
2011–12
|
2012–13
|
2013–14
|
2014–15
|
|
-
|
$240m
|
–$120m
|
–$50m
|
–$70m
|
The existing incentive is currently the largest single mechanism
for public funding support of business R&D.[65] The following table shows the
cost of the existing incentive since 2005–06:
3. Cost of existing incentive over the last four fiscal
years[66]
|
2005–06
|
2006–07
|
2007–08
|
2008–09
|
2009–10
|
|
$867m
|
$1045m
|
$1208m
|
$1369m
|
$1563m (est)
|
The proposed new incentive rests on several tests for
determining whether an activity is eligible for the incentive as a
core R&D activity. These tests, all of which must be
satisfied, are:
1. the outcome of the activity is not
deducible on the basis of current knowledge, information or
experience[67]
2. the outcome can only be determined
by application of scientific method[68], and
3. the activity is for the purpose of
acquiring new knowledge or information.[69]
The existing incentive requires either that the activity:
1. be systematic, investigative and
experimental, and
2. involve either innovation
or high levels of technical risk.[70]
Activities other than core R&D activities which are directly
related to core R&D activities can qualify for the proposed new
incentive if they can be shown to be supporting R&D
activities. To qualify as a supporting R&D activity, the
activity must have a direct, close and relatively immediate
relationship with the core R&D activity.[71]
Activities which are specifically excluded under
proposed subsection 355-25(2) of the ITAA 1997,
which produce goods or services or which are directly related to
producing goods and services, may qualify as supporting R&D
activities eligible expenditure if undertaken for the
‘dominant purpose’ of supporting core R&D
activities.[72] The
dominant purpose is described in the Explanatory Memorandum as
‘the prevailing or most influential purpose.’[73] Under this definition,
activities with a commercial purpose may be eligible supporting
R&D activities provided that the dominant purpose is to support
core R&D.[74]
The dominant purpose test operates to ensure that expenditure on
a production-related activity which does not support a core R&D
activity is not eligible expenditure under the proposed new
incentive. The effect of introduction of a dominant purpose test
will be to exclude some production-related expenditure which is
eligible expenditure under the current incentive. It is this aspect
of the proposed new incentive which has prompted the most
criticism.
The proposed new incentive contains a feedstock
expenditure[75]
adjustment rule equivalent to the feedstock rule in the current
incentive. The feedstock adjustment rule operates to reduce the
amount of the incentive claimed in relation to expenditure on
deductible feedstock inputs (the raw materials used in a process)
by reference to the value of feedstock outputs (the resulting
tangible product). Rather than a deduction or a tax offset
for eligible feedstock expenditure, the rule in the proposed new
incentive takes the form of an increase in assessable income equal
to the value of the feedstock output.[76]
Certain activities are excluded under the proposed new R&D
tax incentive. The list contained in the Bill is shorter than
the list in the current legislation because the tighter definition
of core R&D excludes some activities which are otherwise
specifically excluded.[77] The list of exclusions in subsection 355-25(2)
includes:
1. mineral and petroleum
exploration
2. reproduction of existing products
or processes
3. activities mandated by law
4. research in social sciences, arts
or humanities, and
5. software developed internally for
internal purposes
Note however that activities
in these areas may potentially fall within the meaning of
supporting R&D activity and hence be eligible for the new
incentive.
Innovation Australia[78] has an enhanced role under the proposed new incentive.
It will maintain its advisory role by issuing public
sector-focussed guidance documents.[79] However, under the Bill, it will also
be able to issue private rulings. Further, the proposed new
incentive creates a two-stage registration process whereby
activities must be registered with Innovation Australia in order to
be eligible to qualify for support from the proposed new
incentive.[80]
The proposed new incentive will operate on a self-assessment
basis. The ATO will continue to assess claims and conduct
audit and investigation activities in relation to claims in the
normal fashion.
The Bill contains four Schedules.
Schedule 1 contains the main components of the
new R&D incentive.
Schedule 2 concerns the role of Innovation
Australia in administering the proposed new incentive.
Schedule 3 contains consequential amendments
related to the proposed new incentive.
Schedule 4
contains application, savings and transitional provisions related
to the proposed new incentive.
The Digest will now address each Schedule in turn.
Schedule 1 contains the main components of the
new R&D incentive. It introduces a new Division 355 into
the ITAA 1997. The division consists of 12 subdivisions, as
described below.
Proposed subdivision 355-A contains the object
of the new Division 355:
- to encourage industry to conduct research and development
activities that might otherwise not be conducted because of an
uncertain return from the activities, in cases where the knowledge
is likely to benefit the wider Australian economy, and
- to achieve this object by providing a tax incentive for
industry to conduct, in a scientific way, experimental activities
for the purpose of generating new knowledge or information in
either general or applied form.[81]
Proposed subdivision 355-B
contains definitions for terminology used in proposed
Division 355 of the ITAA Act 1997 (such as “R&D
activities”) and sets out tests for qualifying
expenditure.[82]
Proposed subdivision 355-B
contains tests for determining an entity’s entitlements to
the tax offset.
Proposed subdivision 355-D sets the lower
threshold for eligible R&D expenditure by providing technical
rules for calculating the total claimable deduction (using the
method of ‘notional deductions’).
Proposed subdivision 355-E contains provisions
for deducting the decline in value for depreciating assets used in
qualifying activities.
Proposed subdivision 355-F
contains four simple integrity rules. An R&D entity claiming a
deduction for R&D expenditure:
- must incur the expenditure at arm’s length
- must not deduct the expenditure if it has received
consideration that is greater than or equal to the expenditure
(where it has disposed of R&D results)
- must not deduct more than the R&D asset’s cost before
the disposal, and
- must reduce deductions to reflect mark-ups within grouped
entities.[83]
Proposed subdivision 355-G provide for clawback
of benefits provided by Government to prevent
‘double-dipping'.
Proposed subdivision 355-H contains the rule
for feedstock deductions.
Proposed subdivision 355-I contains rules for
deducing certain expenses incurred by associate entities of
claimant entities.
Proposed subdivision 355-J contains rules
relating to R&D partnerships.
Proposed subdivision 355-K contains rules
relating to treatment of investment in Cooperative Research Centres
(CRCs).
Proposed subdivision 355-W contains rules
relating Innovation Australia’s assessment role including the
effect of findings and provisions for objections to
assessments.
Part 1 inserts a new Part III into the
Industry Research and Development Act 1986 (‘the
Industry R&D Act’). The objects of this Part are:
- to provide integrity for the working out of tax offsets under
Division 355 of the ITAA 1997,
- to increase certainty through findings about matters relevant
to the working out of those tax offsets, and
- to improve access for small and medium R&D entities to
quality research services by maintaining a register of research
service providers.
Proposed divisions 1,
2 and 3 of new Part III contain
complex rules for:
- registration of entities (referred to in the Bill as R&D
entities) seeking incentive for eligible R&D activities by the
Board (defined in the Industry R&D Act as Innovation
Australia),
- activities of the Board related to registering R&D
entities, including making findings regarding applications for
eligible activities, and
- the treatment of R&D activities conducted outside
Australia.
Proposed division 4 contains provisions for
R&D entities to register as ‘research service
providers’, capable of providing research services to R&D
entities.
Proposed division 5 contains provisions for
review of Innovation Australia decisions regarding R&D entities
and R&D activities. Initially the decision will be the subject
of internal review by the Board, but an entity affected by a
‘reviewable decision’[84] may ask the Administrative Appeals Tribunal (AAT)
to review the Board’s decision.[85]
Proposed division 6 contains provisions dealing
with consolidated groups registering for group R&D
activities.
Proposed division 7 contains administrative
provisions including approved forms of decision, decision-making
principles, and rules for R&D entities incorporated outside
Australia or in an Australian territory.
Part 2 of Schedule 2 to the
Bill inserts a number of new definitions and makes other
consequential technical amendments to the Industry R&D Act to
give effect to the new incentive.
Part 1 of Schedule 3 to the
Bill amends the ITAA 1997 to provide measures for determining which
activities are subject to the refundable tax offset rules and which
are not.
Part 2 of Schedule 3 amends
parts of the ITAA 1936 and the ITAA 1997 to allow for deduction of
qualifying expenditure for the year of income in which the
expenditure or liability for expenditure is incurred.
Part 3 of Schedule 3 amends
the ITAA 1997 to provide rules for depreciating capital assets used
for qualifying activities.
Part 4 of Schedule 3 amends
the ITAA 1997 to provide for deductions related to capital works
conducted in pursuit of eligible R&D activities.
Part 5 of
Schedule 3 amends provisions of the ITAA 1936 and
the ITAA 1997 relating to forgiveness of commercial debts incurred
in relation to eligible R&D expenditure.
Among other things, Part 6 contains
consequential technical amendments necessary to give effect to the
proposed Part III of the Industry R&D Act, including minor
amendments to the Income Tax (Transitional Provisions) Act
1997 and the Taxation Administration Act 1953.
Schedule 4 contains provisions for ensuring a
smooth transition from the existing R&D tax incentive to the
new incentive.
Part 1 provides that the amendments made by the
Bill apply for income years commencing on or after 1 July 2010.
Part 2 contains general savings provisions to
ensure that the legal consequences of establishing eligibility for
the existing incentive continue to apply in relation to relevant
commercial actions which occurred before the provisions of the Bill
and the accompanying Bill take effect.
Part 3 contains transitional provisions which
appear as amendments to the ITAA 1936 and the ITAA 1997 and the
Income Tax (Transitional Provisions) Act 1997, including
complicated rules for balancing adjustments resulting from
expenditure incurred for both general tax purposes and for R&D,
and adjustments related to capital gains tax events. Part 3
also contains provisions for continuing the application of certain
aspects of the existing incentive.
Part 4 also contains savings and transitional
provisions relating to aspects of the existing incentive, and
provides for the Governor-General to make regulations prescribing
matters required or permitted (or necessary or convenient) for
giving effect to the Bill.
Concluding comments
The proposed new incentive is a significant departure from the
existing incentive and could be described as an entirely new
measure. Whilst successive exposure drafts of the Bill contained
changes in response to concerns expressed in submissions, the
essential provisions of the Bill – the reworked definitions
and tests – have remained largely unchanged.
The proposed new incentive adopts in part the definition of
R&D in the Frascati Manual, which is basic
research, applied research, and experimental
development.[86] In adopting only the research elements of the Frascati
definition, the proposed new incentive focuses more on research and
less on development. Development activities of some large
entities which qualify for the existing incentive will not qualify
for the proposed new incentive. The fact that the proposed
new incentive is intended to be revenue-neutral could be seen as
both an emphatic statement of policy change and an instance of
careful management of expense measures intended to stimulate
particular investment activities.
The $20 million revenue threshold for entities claiming the 45
per cent refundable credit will direct more financial support to
smaller entities, particularly those entities in tax loss which
will receive cash refunds with no limit on the amount
claimed. Entities in tax loss conducting R&D will tend to
be smaller start-up companies which have not yet commercialised
their research.
The tightened definitions of ‘core’ and
‘supporting R&D’ will mean that some
non-scientific, industrial research activities will not be eligible
activities. This will affect mostly larger entities, and some
activities which are continuing and which are eligible for the
existing incentive will not be eligible for the proposed new
incentive.
Whilst the Treasury has reportedly conducted modelling,[87] Treasury has not as
yet released details. This perhaps reflects the uncertainty
involved in modelling an entirely new tax incentive measure.
Whilst statistics about the effect of similar incentives in other
jurisdictions are available, their probative value is questionable
due to different economic and financial circumstances in each
jurisdiction.
Significant uncertainty still surrounds the Bill. The
Senate Economics Standing Committee is not required to report until
16 June 2010. Should the Bill fail to pass the Senate during
this financial year, the possibility of retrospective application
may create further uncertainty for claimant entities.
Members, Senators and Parliamentary staff can obtain further
information from the Parliamentary Library on (02) 6277 2413.
[23].
Cutler and Company, Venturous
Australia - building strength in innovation, Melbourne, 2008,
viewed 3 June 2010,
http://www.innovation.gov.au/innovationreview/Documents/NIS_review_Web3.pdf
John Murray
10 June 2010
Bills Digest Service
Parliamentary Library
Back to top