October 15th, 2020
Swanson Reed’s overall wish is to see a functional, broad based R&D Tax Regime that provides a generous, stable and predictable incentive for companies to conduct genuine R&D Activity. The Federal Government’s budget announcement last week backing away from proposed cuts to the programme was a step in the right direction.
Our view is that R&D Tax Incentive programme is currently cleaner, and subject to less mischief than it has been in prior years, largely due to the widespread reported compliance “crackdown” by the regulators.
We are concerned, however, that there may still be some progress required in enhancing the integrity of the R&D Tax industry. We are particularly concerned about the guidance we have seen some businesses, still operating post “Crackdown”, provide to potential R&D entities over the past year. These R&D Tax businesses often operate on propositions something to the effect of:
- “We are not registered tax agents or accountants;
- Accountants or tax agents don’t understand the way R&D Projects are conducted, hence cannot advise on R&D Tax Claims to maximise your benefit;
- R&D Tax Incentive is free money that we can help you access;
- We help you maximise your claim and ensure tax compliance, but we don’t provide advice”
It is true that documentation of a solid R&D Claim will require skills that most tax practitioners are not used to providing, such as:
- Literature reviews to identify an existing state of technical knowledge in a field;
- Articulation of a hypothesis for a new product or process based on principles of established science;
- Explanation of why the outcome of an experiment could not be determined in advance based on existing knowledge;
- Explanation of the process for conducting an experiment, including observations and conclusions about the relationship between key test variables.
There are however fundamental intricacies of the R&D Tax Incentive that parties not having an understanding of basic tax issues will not usually be able to suitably advise on. These include, but are not limited to:
- The concept of how the refundable R&D Tax Offset is not a grant of $0.435 for eligible R&D Expenditure, but rather a refundable R&D Tax offset, whereby a company exchanges a general tax deduction (worth $0.275) in exchange for the R&D Tax Offset, and that in situations where a company does not have surplus losses, the cash benefit for R&D Expenditure is $0.16, not $0.435;
- The impact of connected or affiliated entities in determining group turnover for the purposes of determining eligibility for the $0.435 Refundable R&D Tax Offset;
- The impact on personal tax liabilities of a company director drawing a substantial individual remuneration for hours on R&D (where the top individual marginal tax rate of 47% exceeds the company R&D Tax Offset rate of 43.5%);
- Eligibility restrictions around expenditure on tangible depreciating assets, along with the restrictions on R&D Depreciation where an asset is concessionally depreciated, such as via instant write off;
- Adjustments around clawback and feedstock;
- Disclosures at Item 7, Label D (addback of non-capitalised R&D Expenditure) in a company tax return for situations where a company may be capitalising R&D Expenditure for tax purposes;
- Franking account balances;
- The dynamic compliance expectations around the inclusion and basis of apportionment for R&D Overheads, such as rent.
As a company registering R&D Activity (or a tax agent advising a company registering R&D Activity) you should particularly be on the lookout for the following prior to engaging a R&D Tax Advisor, or submitting work they have prepared:
- Do they have both the relevant technical and tax skills necessary to advise on the spectrum of issues relevant to the R&D Tax Incentive claim that you will sign?;
- How long have they been involved with the R&D Tax Incentive and are they up to date with regulator compliance expectations which have rapidly shifted in recent years?;
- Are they transparent and happy to stand by their work? There is a field in the R&D Application which asks the question “Did the R&D Entity rely on advice from a Tax Agent or R&D Consultant to compile this application?”. If a company charging you a fee has clicked “no” to this field, questions should be asked;
- Does the guidance or advice provided not feel right, or seem too good to be true? Particular issues to watch out for, that we have noted with concern include:
- Inflated charges from associate entities for R&D Expenditure which don’t reflect the commercial substance of the R&D Activity conducted;
- Claims for R&D Expenditure which is not validly incurred, or associate entity R&D expenditure which is not paid;
- Claims for R&D Activity not suitably documented;
The ATO will not accept “we were poorly advised” as an excuse, and companies still run the risk of Offset paybacks, interest and penalties for incorrect or aggressive claims.
Swanson Reed, as a firm, includes experienced R&D Tax Advisors well versed in both the technical and taxation issues associated with R&D Tax Compliance.
We welcome competition in the industry, and are happy to see companies conducting genuine R&D Activity receive correct and credible advice on their legal entitlements, no matter the source of the advice.
We do however, want to ensure that the integrity of the profession, and the R&D Tax Incentive, is maintained, so as to ensure that the stability and longevity of the programme is maintained.