Regardless of the details of the Government's policy on the research and development (R&D) tax incentive to be revealed in the Budget in May, what is clear is that the Government has heard the message that the integrity of the program is an issue. Whether and when the Government manages to pass legislation to effect its proposed policy changes, companies claiming the R&D tax incentive should heed the message that the Government is concerned about the integrity of the program. Companies with ongoing R&D programs should carefully consider how the changes affect those programs.
Between now and the Budget
Against this uncertainty, the key steps to consider now are:
- lodge any application before 30 April 2018 (if your company has a standard income period ending 30 June 2017);
- make sure you have the evidence to support the application;
- carefully consider and frame the R&D activities to ensure your activities meet the statutory criteria; and
- consider and manage the uncertainty in entering into any new arrangements or commitments.
Most companies operate on a standard income period of 1 July to 30 June. For companies whose income period ended on 30 June 2017, a registration application for the R&D tax incentive must be lodged by 30 April 2018. Companies must lodge a registration application for each year for which the company wishes to claim the R&D tax incentive. Late applications will not usually be accepted by AusIndustry.
Regardless of the details of the new policy to be unveiled in the Budget, the Government has expressed a concern with the integrity of the current program. In that context, companies should ensure that they have the evidence to support their R&D tax incentive applications.
The Government is particularly concerned about claiming "business-as-usual" as R&D. While this term attracts some controversy, we understand the Government to mean that it is concerned about companies seeking to re-badge and re-package as R&D those activities that it would have carried out as its core business activities in any event, and which do not meet the statutory tests for eligible R&D (without considerable effort to re-package them).
If you are looking to enter into any contracts or commitments relating to your R&D program, carefully consider how to manage the present uncertainty, and whether a "change of law" clause or other termination provisions may be warranted. If the Government change of policy is reflected in legislation without adequate transition arrangements, companies may find themselves with commitments entered into on the basis of the current policy that are no longer supported by the new program.
At Budget time
Companies with R&D programs will want to carefully consider the Budget announcement and papers for:
- how the new R&D tax incentive program will operate; and
- how the transitional provisions will affect ongoing R&D programs.
The Government has signalled that in addition to its general concern about the integrity of the program and avoiding claims for "business-as-usual" activities, it is looking to re-launch the program with an increased focus on additionality, i.e. incentivising new R&D. The Government has signalled that this may be achieved through intensity thresholds for larger companies. A recent report to the Government has also recommended that the Government consider annual and life-time caps on R&D claims for companies and higher levels of incentives for activities that involve partnering with universities.
Companies with existing R&D programs will want to consider carefully the proposed transitional provisions, keeping in mind that the program works on activities (and not whole projects) on an annual basis, not for the life of the projects. This is complicated by advance and overseas rulings which can apply to future years.
After the Budget
It remains to be seen whether the Government is able to pass its proposed changes to the R&D tax incentive, which may be a function of whether the Government seeks to tie those changes to other corporate tax changes. The Treasurer, Scott Morrison, is reported in the Australian Financial Review (April 5 2018) to have expressly linked the R&D tax incentive changes to the Government's policy for a lower corporate tax rate:
"We agree that the corporate tax rate should be lower to create jobs.
"That is one of the problems with having a higher tax rate, it encourages the mining of tax incentives by large firms.
"But lowering the tax burden on business should not be achieved by allowing arbitrary use of tax incentives, it should be done by cutting the rate."
In that context, the fate of the R&D tax incentive policy changes may depend upon whether the Government gets its broader corporate tax reform policies through the Senate.
In any event, the Government has expressed a serious concern about the integrity of the operation of the current R&D tax incentive program. Companies should take care to ensure they have the evidence to support their R&D tax incentive claims and that the claimed activities are properly framed and eligible activities.