The document discusses innovation, the R&D tax incentive in Australia, recent legislative changes and case law related to the incentive. It provides an overview of the incentive, noting it provides accelerated tax deductions and potential refunds for companies conducting R&D. It outlines key reviews and proposed changes to incentive rates. It summarizes two relevant case law decisions regarding what activities qualify for the incentive. It also discusses current compliance focuses and best practices for documenting R&D to qualify for the incentive.
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The Role of Innovation and the Evolution of the R&D Tax Incentive
1. The Role of Innovation and the
Evolution of the R&D Tax
Incentive
2. Presentation Overview
• Innovation and Growth
• Research and Development Tax Incentive
• The R&D Tax Environment
• Legislative Changes
• Recent Case Law
• Current Compliance Focuses
• Best Practice R&D
• Bentleys R&D
3. Innovation and Growth
Innovation is a key driver of company growth and resilience
Compared to businesses that do not innovate, innovative businesses report that they
are:
• 60 per cent more likely to report increases in income from sales and increased
profitability
• Four times more likely to increase the number of export markets targeted
• Twice as likely to increase productivity and employment
• Three times more likely to report increases in investment in training and IT
expenditure
• Five times more likely to increase the range of goods and services offered.
Source: Australian Innovation System Report 2015
5. The R&D Tax Incentive
It is a rules based, self assessment program providing accelerated tax
deductions and potential tax refunds for companies that conduct R&D.
• Administered jointly by AusIndustry & the ATO
• Australia’s premier business incentive mechanism - $2.97 billion
• Claimed by 13,600 companies per annum - $18.5 billion – under
subscribed– growing at 15% per annum
• 45% Refundable & 40% Non Refundable components
• Advisory dominated by Big 4, but seeing a move to smaller providers and
online service offerings
9. The R&D Tax Incentive
Review of the R&D Tax Incentive
The Australian Government announced its intention to examine support for
research and development (R&D), including the R&D Tax Incentive
programme, in the context of the Tax White Paper. The Review will evaluate
the programme’s effectiveness and efficiency, as well as assessing the extent
to which it is meeting its intended policy objectives.
The Government’s National Innovation and Science Agenda, launched on 7
December 2015, initiated a review of the R&D Tax Incentive, jointly chaired by
Mr Bill Ferris AC (Innovation Australia), Dr Alan Finkel AO (Chief Scientist)
and Mr John Fraser (Secretary of the Treasury) under the auspices of
Innovation and Science Australia.
The Government has asked the Review to identify opportunities to improve
the effectiveness and integrity of the R&D Tax Incentive, including by
sharpening its focus on encouraging additional R&D expenditure.
10. The R&D Tax Incentive
Proposed Change in Rates
In the 2015-16 Budget released on 12 May 2015, the Australian Government
reiterated its intention to change the rates of assistance under the R&D Tax
Incentive to 43.5 per cent for eligible entities with a turnover under $20 million
per annum and 38.5 per cent for all other eligible entities, to apply from 1 July
2014.
The Government indicated in March 2015 that it remains committed to re-
introducing legislation to change the rates of assistance. The rates of
assistance currently legislated are 45 and 40 per cent respectively. This
legislation has lapsed and will need to be re-tabled if it is to come into effect.
11. Case Law
Mount Owen Pty Limited and Innovation Australia [2013] AATA 573 (16 August
2013)
The AAT found that none of the activities claimed by the applicant in relation to its
open-cut coal mine at Mount Owen were R&D activities for the purposes of former
s73B of the Income Tax Assessment Act 1936.
Background
1. The Applicant claimed activities relating to a large open-cut mining operation at
Mount Owen in the Hunter Valley.
2. The deposit at Mount Owen was affected by major regional geological faults
which gave rise to geotechnical difficulties and challenges in the mining process.
3. In order to mine at a required depth of 270m, the Applicant claimed that it faced
a number of ‘geological complexities’ requiring R&D to overcome.
12. Case Law
Mount Owen Pty Limited and Innovation Australia: Decision
The Tribunal found that all activities were ineligible on the basis of inadequate substantiation of
hypothesis and evidence of ‘purpose’ for generating new knowledge.
Although it was not disputed that activity occurred, the Applicant could not demonstrate
through documentation that it was conducted to test a hypothesis and failed to detail the
‘experimental’ nature of each of the ‘core’ R&D activities.
Where companies are carrying out (especially operational) activities there is a need to
demonstrate that those activities are R&D activities – and for this you need a number of things.
Some of the important elements are:
1. Purpose of generating new knowledge – this does require evidence. It is –not sufficient to
just assert this, particularly where production purposes exist.
2. Specifics regarding what technical outcomes can’t be known without conducting
experiments – the project being “complex” is not sufficient.
3. Specific experiments that address those technical outcomes – it is not sufficient just to say
the whole activity is an experiment. On risk –whether the outcome can be determined in
advance. It can’t be environmental or commercial risks around the project, it must be the
outcome of specific technical experiments.
13. Case Law
JLSP v Innovation Australia [2016] AATA 23
The Administrative Appeals Tribunal (AAT) considered whether particular activities conducted
by the applicant are “core R&D activities” within s 355-25(1).
Specifically, the matter sought to assess whether a clinical trial carried out in accordance with a
contractual agreement was conducted for the purpose of generating new knowledge.
Background
The applicant company is an Australian-based entity in an international corporate group that
provides biopharmaceutical development services to clients conducting clinical trials under
contract for a foreign related entity's.
Innovation Australia found that the activity in question was experimental, and that it met all
elements of the first paragraph (a) defining “core R&D activities”. However, that the activity did
not suffice paragraph (b) since it was conducted for the purpose of fulfilling contractual
obligations rather than generating new knowledge.
The two central propositions put before the AAT were in relation to “purpose” in s 355–25(1)(b):
1. Whether the purpose for generating new knowledge must be held by the applicant R&D
entity;
2. Whether the purpose of generating new knowledge must be at least the dominant
purpose;
14. Case Law
JLSP v Innovation Australia [2016] AATA 23: Decision
The AAT found that the activity in question was a “core R&D activity” within the
meaning of s355 of the Income Tax Assessment Act 1997 (ITAA 1997).
The AAT agreed with Innovation Australia that to fulfil s355-25(1)(b) the relevant
purpose must be held by the applicant R&D entity. In this case, the AAT concluded
that regardless of the activity being conducted under a contract, the clinical trials
were undertaken with an intention to generate new knowledge about the drug’s
efficacy.
The AAT concluded that the use of the phrase ‘the purpose’ rather than ‘a purpose’
in s355-25 meant the claimant’s purpose must be more than an insubstantial
purpose, but need not be the dominant or sole purpose for undertaking the activity.
The Tribunal determined that the Board was “overreaching” its responsibility by
assessing whether the expenditure would be eligible for the offset. The Deputy
President noted that Board is responsible for administering the integrity of findings
and not assessing the eligibility of expenditure. The Commissioner is responsible
for the integrity of the taxpayer’s assessment of eligible expenditure against these
activities.
15. Current areas of Compliance focus
Software Development
• Software Development vs Software R&D
Mining and Exploration
• History of whole of mine
• Flow Sheet models/Existing Processes
Construction
• Complex engineering but no experiment
• Complying with Regulation
Broad-acre Farming
• Purpose and Scale of Activities
• Inflated Claims
16. Best Practice R&D
• Plan projects, establish technical goals and identify knowledge gaps
• Identify activities and classify as core or supporting.
• Clearly state hypothesis
• Record and communicate knowledge transactions and events
contemporaneously.
• Record time and costs at an activity level identifying the nexus with the
activity.
• Maintain substantiation materials.
MUST HAVE CONTEMPORANEOUS EVIDENCE
· Current Compliance issues raised by AusIndustry
· A Collaborative approach to claiming R&D
· The Bentleys difference demonstrating value (both in Price and Service)
· Tools that support the claims process with continuous consulting
Figure 1.1 illustrates the impact of innovating businesses on an economy-wide basis. Innovating businesses have a disproportionate share of the Australian economy’s total income, internet income and employment compared to firms that do not innovate. Although innovating firms accounted for only 36.6 per centof businesses in 2012–13,10 they accounted for over 60 per cent of employment and sales in the whole economy. Businesses with a higher degree of innovation novelty (for instance, new-to-world or new-to-industry innovators) have an even greater impact.11
The Case for innovation is clear but it is also a expensive and time consuming exercise that has a degree of risk to it.
The R&D tax Incentive is a potential mechanism for reducing the risk of innovation and assisting with the funding of research and Develoment.
So what is it and how does it work?
BeeR&D Tax Incentive was established in 2011 (replacing the R&D Tax Concession) (1985) and provides assistance to R&D performing entities with. The R&D Tax Incentive is established by the legislative provisions under Division 355 of the Income Tax Assessment Act 1997 and Part III of the Industry Research and Development Act 1986.
The R&D Tax Incentive is the largest single programme in Australia to help business undertaking research and development. It is a broad-based, market-driven programme that encourages industry to innovate and invest more into their R&D, putting R&D at the heart of industry growth in Australia and returning more to the Australian economy through gains in productivity and competitiveness. The two core components are:
a 45 per cent refundable tax offset for eligible companies with an aggregated turnover of less than $20 million per annum; and
a non-refundable 40 per cent tax offset for eligible companies with an aggregated turnover of $20 million or more per annum.
A $100 million threshold on R&D expenditure claims under the R&D Tax Incentive programme was introduced in March 2015, and applies to income years starting on or after 1 July 2014. For expenditure amounts above $100 million, companies are able to claim a tax offset at the prevailing company tax rate.
AusIndustry and the Australian Taxation Office (ATO) work closely in the administration of the programme. n Around for a long time Present incentive from 2012 but concession from 1985 – 30 Years
Refundable Offset by Turnover therefore under 20 million turnover
While the Reports have been completed they have not been released due to election restrictions and the timeline for release has not been provided .
Interestingly Prior Reports into the program and submission by Innovation Australia Indicate that the Program has a high level of compliance.
Amendments should not be made lightly as there is high risk of adverse impacts on Australia Innovation Ecosystem
The Review Issue Paper and both the ATO and AusIndustry indicate that the level of compliance with the legislation and policy intent of the program is high
Mining and Exploration – Flow Sheet model Guidance in the wings