Home » News » Swanson Reed observations on media and industry reaction to ATO’s required publishing of R&D data under transparency laws

Swanson Reed observations on media and industry reaction to ATO’s required publishing of R&D data under transparency laws

Following the support of both major political parties, the legislation to enact the publication of Research and Development (R&D) expenditure claimant information was passed in 2021.

Reforms to the policy and administration of the R&D Tax Incentive (R&DTI) program were within Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020.

The first year of claim data to be released under the new transparency measure was FY22 (income years commenced on or after 1 July 2021) and this information was published in recent weeks, which reported:

• The name of the R&D entity claiming the R&D Tax Incentive;
• Their ABN/ACN;
• The entity’s total expenditure on R&D (known as total notional deductions claimed – label Z in Part A of the R&D tax incentive schedule) less any feedstock adjustments (label B in Part B of the R&D tax incentive schedule).

Following the original announcement of the transparency measures in 2021, Swanson Reed updates noted potential benefits (including transparency, benchmarking and accountability) and concerns (including potential uninformed scrutiny, distorted statistics and privacy) around the publication.

The media and industry reaction since the report’s release in recent weeks has been interesting and varied:

• The AFR has posted an article titled ‘Unlikely winners of ATO’s R&D tax rules’ including highlights of claims made by certain large companies and large claims by Gambling Technology companies.
• The Accounting Times published comments by Australian Industry Group that were critical of new reporting requirements for the R&D tax incentive, warning the ATO’s transparency push could worsen falling investment levels and even “inadvertently benefit” non-compliant businesses. Australian Industry Group said it had “significant concerns” that the reporting requirements were exacerbating falling R&D investment levels rather than encouraging compliance.
• Other media outlets have singled out the figures reported by very large companies (including Atlassian and others) and the likely impact of the company tax position.
• Other R&D Advisors whom we respect have noted how the release of data provides a target list for aggressive R&D Advisors or Consultants to approach companies with a platform seeking to increase their published claims.

It is certainly the media’s right (and job) to comment on the release of now public information; however, given the complexity of the R&D Tax Incentive, it must be emphasised that it can be very misleading to form a view about a company’s investment in R&D or behaviour as a taxpayer on the basis of a single R&D Expenditure figure, which may or may not appear in the transparency reports.

For example:

• We are aware of many companies investing significant amounts in R&D Expenditure that is not claimed under the R&D Tax Incentive (or not claimed to the extent of their full legal entitlement). These companies’ absence from the transparency list may lead one to conclude that they are not an innovative company; however, their omission may be for valid commercial reasons including:
  • They may have group turnover greater than $20M, yet have significant accumulated tax losses, meaning they cannot commercially benefit from the R&D Tax Incentive in the near term; or
  • Their technical staff may not have the bandwidth to complete the R&D Application or maintain the requisite supporting information.
• The figures published in the transparency report alone do not allow meaningful analysis of what the reported entities’ R&D Claims may be actually costing taxpayers. For example:
  • The report does not disclose group turnover and whether the company may claim under the refundable or non-refundable R&D Tax Offset.
  • For companies claiming the Refundable R&D Tax Offset (43.5% for most companies), it is not widely reported or understood that when companies claim their 43.5% R&D Offset, they forfeit their general tax deduction for R&D Expenditure (25% for most companies), meaning the net cost to the taxpayer is around $0.185 of R&D Expenditure, assuming the companies may have made use of the foregone tax losses when profitable (and many never will be profitable). The situation gets even more complex when considering the impact of R&D Claims on franking account balances and future profit distributions.

It is also important to consider that an effective R&D Tax Incentive must be stable, known, broad based (i.e. accessible by all industries) and market driven (i.e. the market decides where the best use of scarce R&D Capital should be deployed). Having media comment on how one particular industry segment may be less suitable to benefit from R&D Tax Incentives when compared with others may detract from a key feature of the programme, which is to let the market decide where to make R&D Investments.

Having public pressure on R&D Tax Incentive utilisation by certain companies and industries detracts from the broad based element of the programme, and may support calls by some to divert funding from a broad, market based, self assessment programme to a grant based system that is assessed based on government identified areas of strategic priority. A move towards a grant based system at the expense of the R&D Tax Incentive would, in our view, be a mistake for various reasons, which we have outlined in our previous updates.

The release of the transparency reports and subsequent debates also come at a time when the Government will undertake a strategic examination of Australia’s R&D system, as announced in the May 2024 Federal Budget.

Swanson Reed notes that the issues are complex, but on the whole the change to publish R&D claimant data probably does more harm than good.

Regardless of anyone’s thoughts on the disclosure changes, they are now the law, and stakeholders should be aware of the requirements.

Please get in touch with our office if you require assistance, would like to speak to someone about a potential claim, or check out our website for more information.