Government set to amend R&D tax credit legislation after industry protest

The Government is set to amend its controversial changes to the R&D tax credit after speaking with industry groups and experts, it has emerged.

It comes after weeks of protests from the small business community, particularly smaller IT companies which were told software development and production would no longer be covered under the credit.

As reported in the Australian Financial Review, federal treasurer Wayne Swan has directed the Treasury to create a new R&D plan with an expanded definition of eligible activities.

A key problem cited by protestors was that the draft legislation required activities to be both “innovative and risky”, rather than one or the other. However, it is understood this will now be split into separate definitions, opening up several new activities for eligibility.

Additionally, other changes will see a review of the dominant purpose test, which restricts R&D compensation for non-commercial practices including software development. Many protestors said this would restrict IT companies from developing critical infrastructure, effectively holding back progress.

Tax counsel at the Institute of Chartered Accountants, Yasser El-Ansary, says his organisation has been speaking with the Government regarding the changes and a breakthrough has been reached.

“There were some real concerns that the first draft of the legislation would be devastating for business investment because it would effectively rule out a significant proportion of R&D activity.”

“We’ve been talking with the Government for quite a number of weeks now, and they’ve heard about the need to broaden the policy and design the legislation around allowing more R&D investment.”

The legislation will replace the 125% tax deduction with a non-refundable 40% credit, and a 45% refundable credit for companies with turnover less than $20 million. However, it is not yet known whether these figures will be changed in the amended draft legislation to be released within the next few weeks.

El-Ansary says any new drafts must contain incentives for smaller businesses to engage in more R&D.

“We don’t want to disturb the very significant volume of investment that takes place in all manner of businesses both large and small, and we don’t want to introduce disincentives for R&D.”

“We are pleased the Government is reconsidering its policy. We’ve been in discussions with Treasury as to where we think they could improve, and it looks as though finally our positions on what should be done are being heard.”

While the final legislation was set to be finished by July, it is not yet known whether the new changes will push the start date back any further.