Compliance stopping SMEs from capitalising on R&D Tax Incentive: Thomson Reuters study

The R&D Tax Incentive is a targeted entitlement program designed to help businesses offset some of the costs of doing research and development (R&D). The program aims to help more businesses do R&D and innovate.

It is open to firms of all sizes in all sectors who are conducting eligible R&D. It provides more generous support for businesses, especially small and medium-sized firms, than the R&D Tax Concession that it replaced.

The two core components are:

• a 45% refundable tax offset (equivalent to a 150% deduction) to eligible entities with an aggregated turnover of less than $20 million per annum;
• a non-refundable 40% tax offset (equivalent to 133% deduction) to all other eligible entities.

However, the Incentive is often overlooked by many businesses either because they forget it exists or they are overawed by the compliance aspects of it.

Thomson Reuters has released the results of its R&D Landscape Study, revealing that almost 85% of companies have not been encouraged by the new Tax Incentive to undertake additional R&D.

The Thomson Reuters study, which was carried out in April 2013 with partner Michael Johnson Associates (MJA), found that 84% of companies said the R&D Tax Incentive hasn’t encouraged them to undertake additional R&D activity. It also indicates that 81% of companies are concerned about lodging a R&D Tax Incentive application, with 72% noticing changes in compliance measures from the R&D Tax Concession; and over half (51%) saying these changes have made the process harder.

The Tax Incentive replaced the R&D Tax Concessions on July 1, 2011, taking the emphasis away from tax and placing increased focus on innovation by rewarding proper management of R&D projects. The changes now mean companies are eligible to receive up to 45% return on R&D expenditure from the government.

The study also shows that almost half (46%) of companies feel that the ongoing legislative changes to the R&D Tax Incentive have negatively affected their view of the program – as they think the Incentive is a benefit that can easily be taken away. From July 1, 2013, it is proposed in a bill that is still before Parliament that businesses with aggregated turnover of more than $20 billion per annum will not be eligible for the Incentive.

Commenting on the study, Paul Brindle, managing director for the Tax and Accounting business of Thomson Reuters, Australia and New Zealand said: “The results of the landscape study show us that companies are ill-equipped to take advantage of what is a very generous program. We are seeing that companies do not fully understand the compliance measures they need to undertake in order to receive their refund.”

He said the project management and time-logging aspect of the R&D Tax Incentive program in particular means that an entire company needs to be aware of and involved in how the application works, not just the R&D and tax teams.

Kris Gale, managing partner of MJA, a specialist R&D tax advisory firm and the study’s research partner, said: “These results reflect anecdotal feedback ourselves and MJA have been receiving: companies do not believe they have enough information on the specifics of applying for the Incentive and how it works for their company and industry. We believe further information needs to be made available more quickly. Companies are not being encouraged because they are not being empowered”.

The Thomson Reuters study, which surveyed 177 Australian companies undertaking R&D, also showed that:

• 60% of companies believe the change that has affected their company the most is the new definitions of core and supporting activities;
• 53% said that explaining projects correctly within the set parameters was the biggest concern they faced when lodging an application;
• 60% have a full record-keeping system in place;
• 72% use external advisors to apply for the incentive.

Mr Brindle said that “from our discussions with companies over the last year, it has become apparent that many companies lack the systems necessary to effectively manage projects and complete R&D Tax Incentive applications. In order to encourage companies to apply, it is important to increase their understanding of the process while also providing them with the tools to identify eligibility, gather the appropriate documentation, and maintain compliance throughout their projects.”

Following six months of commercial testing with South Australian software developer, Incite Systems, Thomson Reuters launched ONESOURCE R&D Tax Incentive this year to support companies applying for the Australian Government’s R&D Tax Incentive in light of more stringent record keeping requirements. Further information and details to register for a free online demonstration are on the Thomson Reuters website.

Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.