R&D tax incentive still too restrictive and complex: Expert

A leading expert on research and development assistance says the Government’s revised R&D tax incentive plan is still too complex and will mean many firms will find access to R&D incentives is blocked.

Sandra Mason, a partner at PricewaterhouseCoopers, says the Government is clearly trying to target some sectors or groups within the business community who it feels are getting more that their fair share of R&D tax incentives.

But Mason says the Government’s refusal to directly target these groups has led it to introduce hurdles that will catch a large number of companies.

“The broad policy fixes that they are putting in are just that – too broad. They are going to capture the many to catch the few,” she says.

The Government released its second draft of its new R&D tax incentive legislation on March 31, after the first draft was widely criticised by tax experts and industry groups for making the definition of R&D eligible under the incentive too narrow.

Whereas the current tax credit schemes requires eligible R&D to be either innovative or risky, the first draft of the new tax credit legislation required both tests to be met.

The first draft also made software development ineligible for the R&D tax credit.

However, the second draft reversed these positions. But the second exposure draft, released late on March 31, includes an entirely new – and much broader – definition.

Under the proposed changes, core R&D activities must be “experimental activities whose outcome cannot be known or determined in advance”, must use a “systematic progression of work that is based on principles of established science” and must be “conducted for the purpose of generating new knowledge (including knowledge about the creation of new or improved materials, products, devices, processes or services)”.

The Government also reversed its position on software, which will now be eligible except where it used for internal administration.

Mason says she welcomes these changes but says the legislation needs further work.

“We just don’t think it’s there yet. There are still too many hurdles in the second draft for companies to get over.

“It’s still ill-defined who the government is trying to target. The Government needs to table those examples that it wants to target.”

She is particularly concerned with the introduction of a “dominant purpose” test, which says companies hoping to claim on “supporting” R&D will need to prove that work is for the dominant purpose test of supporting “core” R&D.

But Mason says the dominant purpose test goes too far, particularly for commercially focused R&D. She says traditional supporting activities such as market research, market testing, market development and feasibility studies usually have a dual purpose of supporting core R&D and furthering a firm’s commercial strategy.

“Who just does R&D for R&D’s sake? There’s always a commercial focus in business,” Mason says. .

“Companies will have to walk through that very complex dominant purpose test and I can just foresee the administration of that being very difficult.”

Mason is also keen to see the Government’s new R&D feedstock legislation. While the Government has said the new rules will reflect the current arrangements, Mason says it would be good to “see them before they are introduced into Parliament” as even small changes could make a big difference.
Despite the criticism it appears Federal Innovation Minister Kim Carr is determined to ensure the R&D tax incentive program is “value for money” and able to be accessed by more companies.

“We have 100 firms in this country getting the overwhelming bulk of the benefits of $1.4 billion worth of public support,” Carr told the Australian Financial Review.

“We have got to change that because we have got to get more companies investing in R&D.”