Quarterly R&D Tax Credits - Have they gone the way of the Dodo?

October 28th, 2013

R&D Tax Incentive - Swanson Reed Specialist R&D Tax AdvisorsThe Tax Laws Amendment (2013 Measures No. 4) Bill 2013 aimed to establish a new scheme for making refundable tax offsets available in quarterly installments.

Under that proposed scheme, eligible small and medium companies would access installments on a quarterly basis in anticipation of claiming the 45 per cent research and development refundable tax offset at the end of the income year.  It is the first of its kind in Australia.

However, with a new Parliament comes a new plan to boost innovation in this country and the ‘quarterly credits’ idea at least for the moment appears to have been shelved by the LNP. Was David Bradbury and Labor the only supporters of this scheme, and if the Abbott Government gets onboard, can they get it through the Senate post June 2014?

For the moment at least, the legislation will not begin in January 2014 as initially planned. But if the idea did spontaneously re-ignite again, how would it work?

The Introduction of  Quarterly R&D Tax Credits

It has long been suggested by many businesses, that the ability to receive a recoupment of R&D expenditure as it is incurred throughout the year would ease cash flow constraints. The previously proposed bill address many of the suggestions of small and medium business.

The ability of a company to receive a short-term recoupment of eligible costs also makes the proposition of investing in R&D more attractive and attainable to many businesses in the SME sector.

Technology companies in the start-up phase will also benefit from the system and the enhancement to their working capital stream.

Swanson Reed notes that for the quarterly credit system to operate effectively, timely processing of the credits will be crucial. This timing includes both the registration notification by Innovation Australia and the processing of any funds due by the ATO.

It is the feedback of some businesses that waiting periods for annual R&D tax offsets receivable under the previous R&D Tax Concession regime can sometimes exceed 4 Months. This includes cases where R&D schedules are lodged within the company’s initial (not amended) income tax return.

Swanson Reed recognises that the validity checks undertaken by the ATO prior to the release of R&D offsets are a vital mechanism for maintaining the integrity of the R&D tax regimes. However, it is our recommendation that resources within the ATO be increased significantly to ensure adequate processing times and for the quarterly credit system to provide the benefits intended.

Administration of R&D Quarterly Tax Credits

Swanson Reed agrees that if the quarterly credit system is reintroduced, it should be as a joint administration between the ATO and Innovation Australia.

The requirement that a company must submit an outline of proposed R&D activities to Innovation Australia for consideration will encourage companies to better plan their R&D activities and the documentation underlying them. The process may also coerce companies to better budget for their R&D activities given the prospect of quarterly inflows of cash throughout the year.

Swanson Reed notes that, per the consultation paper, companies who apply to receive quarterly credits may be subject to subsequent findings by Innovation Australia as to whether the activities are considered to be eligible. We recommend that, where possible, such findings should be made prior to the acceptance of any notification for quarterly credits, to avoid situations necessitating the recoupment of quarterly credits following the issue of adverse findings.

Swanson Reed agrees with the timing of the cut-off date for applications to receive quarterly credits (i.e. the 28th day after the end of the quarter). We also recommend that time frames for the receipt (or crediting) of quarterly credits be structured to correlate with this timing, such that companies’ general Business Activity Statement (BAS) obligations are administered in conjunction with the quarterly credits.

Allowing companies to consolidate their reporting for quarterly credits within their BAS would minimise compliance burdens, while also allowing companies to offset any quarterly credits due against their PAYG withholding and GST liabilities.

Swanson Reed also agrees with the proposed requirement for companies to continue to lodge annual registration applications and R&D schedules as a means to reconcile the amount of quarterly credits received throughout a year.

Access to the Quarterly Credit Regime

Swanson Reed recognises that appropriate risk mitigation procedures must be put in place to maintain the integrity of the R&D Tax Incentive and quarterly credit systems.

Accordingly, it is reasonable that companies that are not complying tax payers will be deemed to not have the requisite discipline to access the quarterly credit system.

Swanson Reed would, however, recommend that an option be explored, allowing companies without a history of lodgements within the R&D Tax Incentive regime to be allowed to use the quarterly credit system.

Access for such companies could possibly be subject to:

  • The company being a compliant tax payer (or in the case of newly incorporated entities that the directors and their associated entities having a history of ATO compliance); and
  • The entity being subject to more rigorous reporting requirements than would normally be required of a company with a history of R&D incentive claims. For example; a company who has no prior R&D tax incentive claim history, but who has obtained an advanced finding by Innovation Australia, may be considered suitable to access the quarterly credit system.

The ability for companies to obtain a recoupment of their R&D expenditure in the short term (rather than having to, potentially, wait for 12–20 month, if claiming the R&D Tax Incentive within their annual returns) may again make the prospect of undertaking R&D activities more attractive to small companies.

It may also increase the attractiveness of investment in start-up companies and lead to the creation of new ventures; i.e. a ‘semi-guaranteed’ and relatively immediate recoupment of R&D expenditure may be a catalyst for the inception of companies that may otherwise not have been able to generate sufficient seed capital.

The above may have spill-over effects and inspire entrepreneurial activity and innovation throughout the Australian economy.

Calculation of the Quarterly Credit Amount and Interaction with Annual Claims

Swanson Reed agrees with the proposition within the consultation paper, that Quarterly Credit amounts be derived from the company’s most recent income tax return lodged (i.e. a base year).

We do, however, have a particular concern in relation to situations where a company may have the same or more eligible R&D expenditure as their base year, although be due a significantly less net R&D tax offset, due to other parameters of the company’s tax position. An example of such a situation is illustrated below:

Base Year

Subsequent Year

Sales (a)

$5,000,000

$6,000,000

Total Expenses (b)

$5,500,000

$5,000,000

R&D Expenditure Within Expenses (c)

$1,000,000

$1,500,000

Pre R&D Taxable Income (A-B)

($500,000)

$1,000,000

Add Back R&D claimed as Offset (c)

$1,000,000

$1,500,000

Adjusted Taxable Income

$500,000

$2,500,000

Income Tax Payable on Above (30%)

$150,000

$750,000

Credit for R&D Tax Offset (C*45%)

($450,000)

($675,000)

Add Quarterly Credits Received Throughout Year

$300,000

Net Tax Payable (Refundable) Alongside ITR

($300,000)

$375,000

Swanson Reed acknowledges that companies will, indeed, have use of funds derived from Quarterly Credits throughout a year and not be subject to general interest charges (GIC), if any requisite adjustment payments are paid on time. However, the reception of funds from quarterly credits may present companies with the temptation to spend, invest, or return the funds to shareholders, and not be in a position to attend to adjustment payments upon lodgement of their annual income tax returns.

Companies must, therefore, exercise financial discipline when receiving quarterly credits under both ‘Safe Harbour’ and varied amount methodologies, and understand that the net R&D tax offsets receivable within their annual income tax returns are a culmination of all of the following variables:

  • R&D expenditure for the current year;
  • Profit/taxable income for the current year; and
  • Availability of any tax losses carried forward from prior years.

Swanson Reed recommends that, as part of the compliance process for lodging and receiving quarterly credits, companies should be required to self assess the interaction of the above factors, especially when transitioning out of start-up/tax-loss phase. This would assist companies to determine whether the amount of a quarterly credit for a particular quarter was suitable, and if not, to vary the quarterly credit accordingly.

Conclusions 

The Tax Laws Amendment (2013 Measures No. 4) Bill 2013 did not pass both houses prior to the dissolution of Parliament on 5 August 2013 and therefore will not come into force in January 2014 as initially planned.

Swanson Reed would like to see a new debate emerge around the ‘quarterly credits’ concept, with a view to eventually reintroduce legislation into Parliament by June 30 next year.  If the administration issues can be resolved, there is no doubt that the scheme would provide much valuable cash-flow  to small businesses and therefore help provide increased confidence in industry generally, especially in manufacturing.

 

 

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