Senate report backs new R&D scheme, but businesses still unhappy

A Senate Committee report into the Government’s controversial new R&D tax credit scheme has endorsed the plan and recommended that the legislation supporting the scheme be passed in time to have it up and running by June 30.

But business groups, led by the Australian Industry Group, remain unhappy with the plan and say the tighter eligibility requirements will result in a reduction in innovation in the business community.

The Senate Committee, which was dominated by Labor senators, attacked the current R&D tax concession scheme, saying that 60% of Government spending on business R&D was being “consumed by 100 firms out of Australia’s two million enterprises”.

The Committee also said opposition to the new credit scheme, which has been led by representatives of the big four accounting firms, was aimed at protecting the interests of these big firms.

“Too much support under the current scheme is going to large established firms undertaking routine spending only tangentially related to research and benefiting only themselves,” the Committee said.

“It is unsurprising that such firms, and their advisers, may oppose the bill, but the mere fact that big companies currently receive support is not in itself a justification for their continuing to receive it.”

The major change recommended by the committee was to make firms with less than $20 million in revenue exempt from the “dominant purpose” test, by which companies hoping to claim on “supporting” R&D will need to prove that work is for the dominant purpose test of supporting “core” R&D.

Yasser El-Ansary, tax counsel at the Institute of Chartered Accountants, says the exemption is a good idea, as this “dominant purpose” test looms as one of the most complex areas of the new tax credit schemes, and SMEs who can avoid having to deal with it are more likely to undertake R&D.

“I think it’s a sensible idea. The dominant purpose test is going to be one of the biggest challenges under this new scheme because it is new and hasn’t been applied in an R&D context.”

“It will be some period of time – perhaps some years – before there is clarity around what that test means in an R&D sense and it makes sense to exempt SMEs from that.”

But there are still plenty in the business community who are unhappy with the new scheme, including the Coalition Senators on the committee, who delivered a dissenting report pushing for the new scheme to be delayed until July 1, 2011 to allow for further drafting, including improvements to the eligibility criteria.

The Australian Industry Group also wants the Government to reconsider the eligibility rules under the new scheme, or risk seeing “a reduction in business innovation”.

“We urge the Government to reconsider its position ahead of the imminent senate vote and not to proceed with the restrictions on eligibility for the R&D tax incentive. We believe the broad-brush restrictions to eligibility should be dropped. If adopted, these restrictions would radically change the research and development tax incentive to one focussed primarily on research.”

The Senate is expected to debate the bill over the coming week.