June 30th, 2020
In December 2019, the government re-introduced a bill to reform the R&D Tax Incentive.
This bill was a slightly modified version of a previous reform bill (Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2018), which did not pass through the Senate at that time. A Senate Economics Legislation Committee recommended in February 2019 that the initial bill should be deferred from consideration until further analysis of the bill’s impact is undertaken, particularly with respect to concerns around the proposed intensity threshold and refundable offset cap.
The media has reported this week that if the government is successful in passing proposed changes to the R&D Tax Incentive, they would seek that the law be enacted more than 12 months retrospectively: applying 1 July 2019 for the FY20 period.
The revelations arise from statements by ATO and ISA officials to the Senate Economics Legislation Committee during the hearings into the review of the proposed R&D Tax Incentive Reforms.
The bill has been uniformly condemned by Industry Groups and R&D Tax Professionals.
It was however thought that if the bill were to be passed as law, the changes would be more likely to apply for the FY21 period (rather than FY20 as proposed) given that:
- It is widely considered to be bad government practice to pass tax law retrospectively. This principle becomes magnified in this instance, as the R&D Tax Incentive is designed to impact investment decisions;
- Much uncertainty surrounded the implementation of proposed reform, and with only draft legislation and an accompanying EM, companies were yet to be able to access and digest guidance material on issues such as determination of “total business expenditure” which had subsequent impacts on their intensity threshold and rate of tax benefit for R&D Expenditure;
- Australian Companies were already reporting declining business investment in R&D and a high degree of uncertainty due to the COVID-19 situation;
Smartcompany and InnovationAus have reported that:
- If the law is passed, and then applied retrospectively for the FY20 period, companies filing R&D claims between the current financial year 1 July 2020 (when FY20 registrations open) and when the laws are eventually passed will be later asked to revise their FY20 company tax return and R&D schedule;
- Legislation enacting the cut is currently before the Senate, but will not be voted on until at least August, after the committee files its report; the ATO is legally required to administer the program under current laws until then, raising the prospect of back payments for 2019-20 claimants;
- A quote from an ATO representative which noted: “We would be advising taxpayers who lodge in accordance with the existing law to do so, and then later revisions would be needed to their company tax return and R&D schedule, because of the effect that the retrospective legislative changes would have”;
- The ATO will not impose tax-shortfall penalties or interest attributed to those shortfalls for companies revising their R&D claims due to a retrospective passing of the legislation, but amendments to claims would be required in nearly all cases due to the lower rate of R&D Tax Offsets offered by the proposed reforms.
Given the widespread financial hardship business is currently facing, many companies have spent recent weeks compiling their FY20 R&D Claims to best ensure that they are able to lodge shortly after the opening of registrations on 1 July 2020. The prospect of a retrospective passing of the proposed R&D Tax Reforms for FY20 is alarming, and exposes companies to undue uncertainty and administrative burden in the event that company tax return amendments for previously assessed FY20 claims are required.
Swanson Reed’s position is that:
- The current bill to reform the R&D Tax Incentive should be withdrawn altogether due to the seemingly unanimous condemnation of it by all relevant stakeholders;
- If the bill is passed, that an amendment be made to defer the start date of the bill to be FY21 or FY22, to allow companies sufficient time to attain and understand relevant guidance material on the reform’s implementation.
We call on both sides of government to commit to a stable R&D Tax Incentive, and are of the view that the programme would be most effective in achieving its policy objectives if not subject to further proposed changes.