R&D bill passes Senate, but tax and business experts concerned over compliance burden

Businesses are being urged to review their research and development spending after the Government’s new tax credit bill passed the Senate last night, although some business groups and tax experts are warning there are still some uncertainties around how the legislation will work.

Some of the concerns are related around specific industry codes, and the administrative burden of businesses looking to claim the tax benefit.

The Australian Industry Group has said that it remains unconvinced whether the new R&D bill can be effective supporting research in the manufacturing sector.

“We will be closely monitoring the take-up and effectiveness of the scheme and would urge the Government to be open to future amendments,” chief executive Heather Ridout said in a statement.

However, PwC partner Sandra Mason says the bill will now allow businesses to seriously think about how they are going to access support, and urges SMEs to reconsider how they will be spending their money now the legislation has passed the Senate.

“They will need to reassess if their current claim is going to be made, going forward.”

Mason also praised the start date of July 1, 2011, along with another amendment introducing the benefit of quarterly payments beginning from January 1, 2014, saying they will both provide businesses with certainty to start spending.

“It’s good to see that our commentary has been taken on board by the Government, with the bill having gone through several changes.”

Several business groups and organisations including PwC and the Australian Industry Group have expressed concerns have some aspects of the legislation, including the dominant purpose test which determines whether activities are eligible to be claimed under the credit.

However, Mason says PwC is confident these will be sorted out through the guidelines formed by AusIndustry. “We are confident the guidelines that are to be formulated will clarify these issues and remove them,” she says.

“I’m definitely looking forward to seeing industry specific guidelines. Various industries in my mind are very keen to be involved, but obviously we are yet to see those.”

KPMG has also welcomed the legislation, with partner David Gelb saying that “this will undoubtedly encourage entrepreneurship and assist Australia’s global competitiveness”.

He also praised elements of the R&D bill that will allow multinational companies to allow their Australian subsidiaries to access the credit.

“For example, multinationals will be able to own IP offshore and use their Australian subsidiaries to conduct R&D on a contract basis,” he says.

However, concerns remain. BDO Brisbane R&D leader Nicola Purser says there are a number of uncertainties surrounding the bill, particularly around compliance burdens.

She explains that under the current proposal, companies will need to separately capture, report and cost both “core” and “supporting” R&D activities, resulting in a significant administrative burden.

Mason agrees, saying that documentation will be “key” for the program.

Purser also explains that the current structure of the dominant purpose test will mean manufacturers won’t be able to access critical R&D funds.

“Businesses with turnover below $20 million are the main beneficiaries of the reforms, but due to the ‘revenue neutrality’ concept there may be up to $1 billion of assistance cut from the scheme, penalising a number of our leading innovators,” Purser says.

She also says that the quarterly payments amendment is unclear, and questions how it will work in practice.

“The actual determination of eligible expenditure on a quarterly basis will introduce a significant compliance burden, particularly for SMEs, and any sort of estimate system could leave cash-poor companies in a position of having to repay the ATO part of the credit they have received,” Purser says.

“While the new scheme is aimed at SMEs, these are businesses with the least resources to implement additional systems or processes to capture eligible expenditure.”

Echoing Mason, Purser says guidelines “were urgently required”.

“Companies are urged to review their current processes for substantiating R&D, ensuring they are still practical under the new scheme.”