R&D Tax Incentive National Reference Group meeting on 28 November 2013
On 28 November 2013, Donna Bagnall of the Institute represented the Institute at the Research and Development (R&D) Tax Incentive National Reference Group (NRG) meeting in Canberra. The NRG is the peak consultative forum for the incentive.
Issues raised and discussed at the meeting included:
- Recent AAT decisions, such as the DBTL case – discussion of concerns around the Tribunal’s approach on a number of aspects of core R&D activities, e.g. the requirement for a 'hypothesis' to be evident in activities; the required location of technical risk within an activity; and the interpretation and application of the 'purpose test', being a dominant purpose (para (a)). Also discussed was the observation that taxpayers are obtaining poor outcomes in many of the recent AAT cases due to their failure to adduce sufficient evidence on appeal to make their case. Such appeals are a full merits review where the Tribunal steps into the shoes of the original decision maker and hears the matter afresh, so evidence is critical.
- ATO update:
- Draft ATOID on Building expenditure was discussed. Concerns were raised about the breadth of the ATO’s interpretation of the building expenditure exclusion, with the view that it goes beyond what has traditionally been understood as being excluded.
- Taxation Determination on R&D activities involving the design of a tangible depreciating asset during a project spanning a number of years. Issues were raised about what happens if the tangible asset never eventuates.
- AusIndustry update – Compliance Ready reviews undertaken and broad outcomes were discussed. Overall, AusIndustry has found broad compliance and assessed low risk ratings, however there have been an increased percentage of reviews going from desk top to higher review to get to that assessment; Registration Smartform feedback was discussed – concerns about 2000 character limit; Data for Registrations and Advance / Overseas Findings – discussed need for R&D registration pattern to change and be brought forward near to 1 July so that small claimants can obtain their R&D refunds in a more timely manner. Claimants should also ensure their tax agents lodge their returns promptly where R&D refunds are available.
The Minutes of this meeting will be made available to members when they are published.
The Minutes of the NRG meeting on Wednesday 10 April 2013 have been released.
R&D Tax Incentive National Reference Group meeting on 10 April 2013
On 10 April 2013, Donna Bagnall of the Institute represented the Institute at the meeting of the Research and Development (R&D) Tax Incentive National Reference Group (NRG) in Canberra. The NRG is the peak consultative forum for the incentive.
Technical and administrative issues raised and discussed at the meeting were:
- Core R&D – the supporting evidence required to demonstrate how the company established that the results of the activities could not be known in advance.
- ‘Not at risk’ and ‘clawback’ - how these provisions interact and are intended to apply in relation to government grant funding.
- Application of the feedstock provisions – whether the provisions allow you to ‘opt out’ of the feedstock expenditure claim and feedstock adjustment provisions, and if so, whether feedstock expenditure can be deducted as an ordinary deduction.
- R&D application forms – online ATO schedule and online AusIndustry registration form issues experienced and feedback.
- Level 1 Compliance visits – purpose of visits and taxpayer experiences.
Other key agenda items included:
- ATO update – Calculator and Schedule issues; impact of the Refundable offset on R&D expenditure; Payments to associates; Impact of definitional changes on claims under concession v. incentive.
- AusIndustry update – registrations; Advance / Overseas Findings; status of 2012/13 Guidance and Education Agenda; development of 2013/14 Guidance and Education Agenda.
In addition to these updates, a presentation was delivered on a high-level R&D training session that AusIndustry are currently developing and plan to roll out from this year - the R&D Tax Incentive Curriculum. The proposed sessions are designed to promote the new R&D Tax Incentive to tax agents and tax professionals and create a basic awareness of the benefits of the incentive for their clients/own business. The session will involve two modules delivered over 6 hours: (1) Understanding the Business Benefits and Key Features of the Concession); and (2) Registering, claiming and record-keeping. Next steps are expected to be pilot sessions conducted with the assistance of the professional bodies, so watch this space for information on future sessions available to members.
R&D Tax Incentive National Reference Group meeting on 4 December 2012
On 4 December 2012, Donna Bagnall of the Institute represented the Institute at the meeting of the Research and Development (R&D) Tax Incentive National Reference Group (NRG) in Canberra. The NRG is the peak consultative forum for the incentive.
Key agenda items discussed at the meeting included:
- Update from AusIndustry on R&D Tax Incentive Outlook:
- There is a focus on a ‘whole of program’ approach between AusIndustry and the ATO, including streamlining of processes and information sharing, within legal constraints to ensure confidential information is secure.
- Key priorities include timely, clear and principles-based guidance, joint AusIndustry-ATO guidance products, and the Advance and Overseas findings process.
- Registrations (as at 30 November) – over 95% of applications were made online. There were approx. 2,200 registrations for 2011/2012 (the new tax incentive), and 98% were companies with less than $20 million turnover. To date, there have been around 1200 claims processed (over $900 million) under the new tax incentive, and over $400 million paid as refundable offsets.
- Advance and Overseas Findings (as at 30 November) – there were approx. 190 applications and 108 have now been decided, with 35 more at the final stages.
- Split between core and supporting activities - a preliminary analysis (of Advance findings applications) indicates that the split is approx. 30% core and 70% support activities.
- Guidance and Education – there is a variety of guidance now available on AusIndustry’s website, including general guides, sectoral guidance, fact sheets and information sheets. Interpretative products are also being developed, such as the draft Feedstock ruling. In response to submissions, more guidance on how the feedstock rules apply in practice will be issued in the form of ATO IDs. Some key issues on which guidance is still forthcoming are the clawback provisions and the building exclusion (the subject of some current disputes which may be litigated). Members identified ‘dominant purpose’ as another priority issue for guidance.
- Richard Shaddick, Board member of Innovation Australia, gave a brief presentation on key trends. One emerging trend is that applicants have found it difficult to identify the ‘hypothesis’ in their R&D activities, as is required by the law. Members noted that this may be because of the way the R&D registration form is designed as it requires the ‘technical objective’ to be specified, which may be quite different to the hypothesis, particularly in the context of applied R&D, as opposed to pure, scientific R&D. Another interesting issue was whether the new “dominant purpose” test in the ‘R&D supporting activities’ context may be less objective (more of a subjective test) than the Part IV dominant purpose test in which the legislation makes it clear that it is an objective test.
- Members again raised the issue of potential ‘black hole’ expenditure – whether an ordinary deduction can be claimed where there is an “entitlement” to an R&D deduction, both generally and in the context of the feedstock rules where the feedstock adjustment only arises if the R&D feedstock deduction is “obtained”. AusIndustry’s policy division is following up on the issue and the sense was that this did not sound like what was intended. The various provisions were intended to avoid duplicate deductions.
- Members also raised issues about the Advance Findings process, including concerns about the turnaround time for findings being 4-6 months, rather than under 90 days as was the understood standard. AusIndustry clarified that there was no commitment to a 90 day turnaround for these applications, and explained that the Advance Findings process is one where there is a higher level of information required, due to the binding nature of the finding, and that many delays have been caused by applicants providing inadequate details and documentation in their applications. AusIndustry urged applicants to ensure that they use the function to attach documents to provide further information, as the form has word limits and it alone is unlikely to allow enough information to be contained in it.
- R&D Quarterly Credits are scheduled to commence in the 2014 calendar year, so for 2013/14 income year, they will apply to quarters 3 and 4. Instalments will mirror the PAYG Instalment system, and the ATO will advise a ‘safe harbour’ amount based on the most recent assessment (which can be varied up or down). Taxpayers must meet the eligibility requirements to qualify, including having a history of claiming the R&D tax concession, and be expecting to receive a refundable offset (i.e. be in tax losses).
R&D Tax Incentive National Reference Group meeting on 12 July 2012
On 12 July 2012, Donna Bagnall of the Institute represented the Institute at the meeting of the Research and Development (R&D) Tax Incentive National Reference Group (NRG) in Canberra. The NRG is the peak consultative forum for the incentive.
Key agenda items discussed at the meeting included:
- An update on the ATO’s progress on the feedstock ruling. The draft public ruling entitled Income tax: Research and development: feedstock adjustments has been prepared and was considered by the rulings panel on 28 June 2012. The ruling covers the six issues identified by the NRG members, as well as a new issue 'transformed feedstock output'. The ATO expects to be able to issue the feedstock ruling on 9 August 2012
- Members also considered a draft ATOID on feedstock adjustments relating to creation of a prototype, and an agenda item on livestock as feedstock which demonstrated the difficult questions of interpretation regarding the feedstock provisions and the uncertainty around their intended operation
- Concerns were also discussed regarding potential ‘black hole’ expenditure – whether an ordinary deduction can be claimed where there is an 'entitlement' to an R&D deduction, both generally and in the context of the feedstock rules where the feedstock adjustment only arises if the R&D feedstock deduction is 'obtained'. So, if a company opts out of the adjustment by electing not to claim feedstock expenditure, the Institute was of the understanding that in this case, it was intended that an ordinary deduction would still be available. The ATO undertook to consider its view on these issues more closely and to clarify the position
- Other technical queries discussed included R&D activities conducted for a foreign entity and whether multi-lateral contracts are compliant with para 355-220(1)(d); Overseas expenditure test; eligibility of fees such as legal, advisory and patent searches
- Discussion of the draft Information and Computer Technology (ICT) Guidance product which has been developed with and for the ICT industry. Key issues dealt with in the draft ICT guidance centre on required features of core activities – experimental, ‘not knowable in advance’ and the internal administration exclusion from core activities
- Future targeted guidance is also envisaged and specific issues papers are now being prepared for the biotechnology, food manufacturing, construction and mining, and minerals sectors.
- Proposed R&D Quarterly Credits option – legislation is to be introduced to Parliament in the spring sittings, and is expected to be passed in the new year, with effect from July 2013
- Update on the Integrity Assurance Framework for the R&D tax incentive which is outlines AusIndustry’s approach for achieving the program’s goal of driving innovation. The cornerstone of the framework is ‘guidance’. The intention is a ‘guidance-led’ delivery focus to enable effective self-assessment and compliance. ‘Awareness raising’, ‘risk review’ and ‘findings’ are other core elements of AusIndustry’s assurance framework
- Various tools have already been developed to assist potential applicants, such as an 'R&D eligibility tool' to assess eligibility for the incentive (available on AusIndustry’s website), and an online R&D calculator to assist claimants calculate and prepare their claim (available on the ATO’s website) .
R&D Tax Incentive Online Eligibility Tool is now live and operational
An 'R&D Tax Incentive Online Eligibility Tool' is now live and operational on AusIndustry’s website. The R&D tax incentive replaced the R&D tax concession, and applies for income years commencing on or after 1 July 2011.
Before applying to register for the R&D tax incentive each year, companies self-assess their eligibility. AusIndustry has developed the Online Eligibility Tool for the new R&D tax incentive to help you assess the likelihood that your company and its R&D activities are eligible for the incentive.
AusIndustry is actively promoting the new R&D tax incentive to both existing registrants and new applicants, emphasising that 'increasing investment in R&D is critical to boosting innovation, productivity and competitive advantage. It is good for individual firms and good for the nation’s economy. The R&D Tax Incentive provides targeted, generous and easy to access support for eligible R&D activity. The benefits available are:
- a 45 per cent refundable tax offset to eligible entities with an aggregated turnover of less than $20 million per annum
- a non-refundable 40 per cent tax offset to all other eligible entities.
Companies register their eligible R&D activities with AusIndustry and claim the tax offset in their company tax return through the Australian Taxation Office.
AusIndustry is working closely with companies to develop and provide guidance that helps them understand, register and comply with the Incentive.'
Members should also be aware that registration for the R&D tax incentive opened on 1 July 2012, and that the online Application Form for Registration of R&D Activities is now available on AusIndustry’s website. A copy of the Application Notes is also available – it consolidates the help and hover text contained in the form.
R&D tax incentive – National Reference Group meeting on 19 April 2012
The Research and Development (R&D) Tax Incentive National Reference Group (NRG) met for an ad hoc workshop on 19 April 2012. The NRG is the peak consultative forum for the incentive.Key agenda items discussed at the meeting included:
- New definition for core and supporting activities - the issues discussed were organised into three categories:
- Aggregation/Disaggregation of activities
- Distinguishing between core and supporting R&D activities
- Establishing the dominant purpose test of supporting core R&D activities
- Information technology (IT) – it was noted that it is an especially challenging sector to rule on and it was acknowledged that there is a need to look closely at this sector in the context of relevant/eligible activities for the R&D Tax Incentive
- The application of feedstock rules – members discussed the practical difficulties in calculating the feedstock adjustment in cases where there were multiple processes in developing marketable products.
For further information on the meeting, please refer to the 19 April 2012 minutes of the meeting.
R&D Tax Incentive National Reference Group meeting on 20 March 2012
On 20 March 2012, Donna Bagnall of the Institute represented the Institute at the meeting of the Research and Development (R&D) Tax Incentive National Reference Group (NRG) in Melbourne. The NRG is the peak consultative forum for the incentive.
Key agenda items discussed at the meeting included:
- Presentation from the Chair of the R&D Incentives Committee, Mr Richard Shaddick. The Committee intends to be proactive in reviewing certain key decisions of the Department (AusIndustry) concerning R&D activities, e.g. whether activities are core or supporting.
- Discussion of priority guidance issues required from the ATO and AusIndustry – urgency of the ‘feedstock’ ruling was again emphasised. Other issues included ‘on own behalf’ and ‘at risk’ provisions, ‘core R&D activities’ and ‘supporting R&D activities’ – how to define and describe;, and operation of the ‘dominant purpose’ test
- The Institute requested worked examples (using facts based on real case scenarios) illustrating a comparison of eligible R&D activities and expenditure under the former R&D tax concession v. under the new R&D tax incentive. AusIndustry agreed to this suggestion
- The Institute noted that the Explanatory Memorandum for the new ATO power to retain refunds contains an example (See eg. 7.3) where the power is applied to delay paying an R&D refundable tax offset claim. The ATO confirmed that it is intended that the power will be used in respect of R&D tax offset claims in cases considered to be a high risk of fraud or incorrect claim
- Update on the Registration SmartForm – AusIndustry is proposing to put the draft registration form (non-functional but showing the hover-text explanatory fields) up on its website within the week. Go-live final form (fully functional) will not be available until the end of June 2012
- AusIndustry noted that registration is the start of the process, so it is not about audit readiness in terms of the detail claimants need to provide. Rather, business record-keeping is at the heart of audit readiness and demonstrating compliance
- The Institute requested AusIndustry to prepare and provide samples of completed Registration forms for various industries and projects, to illustrate what level of activity description, etc is contemplated by AusIndustry and expected of applicants. AusIndustry agreed to do this and they are now underway with this work
- The Institute requested that AusIndustry develop an email alert function that can be subscribed to as a means of receiving updates when new content is posted on the website. AusIndustry advised that it has this function, however they have since realised that it had been inadvertently disabled as a result of a changeover in IT platform. That function is now being reinstated should members wish to subscribe
- The ATO’s approach to ‘building expenditure’ was discussed, with members concerned that ATOID 2012/5 represents a U-turn on the existing ATO view.
R&D Tax Incentive - National Reference Group meeting on 1 December 2011
On 1 December 2011, Donna Bagnall represented the Institute at the R&D Tax Incentive - National Reference Group meeting. Key issues discussed at the meeting included:
- Registration and submission process – the new R&D registration application form for 2011/12 is not expected to be available until May 2012
- Advance and overseas findings – this application form should be released shortly now that the R&D Regulations have been passed
- R&D Regulations – the Regulations were passed with amendments which included a number of changes relating to the information that is required on application forms. Only total R&D expenditure will be required to be apportioned between core and supporting expenditure, not expenditure at the project or activity level
- Schedule 2 form - ATO update on key changes to the form so it is modified for the new 40% and 45% credit, and the new feedstock and clawback provisions
- The proposed feedstock ruling – members at the meeting sought clarification of the new feedstock provision via an expedited guidance product as a matter of urgency, due to the considerable uncertainty around the provision and its operation
- Pre-registration review (fraud detection) pilot – AusIndustry has commenced a pilot program on offset claims to fine tune risk filters in advance of the first claims for the refundable R&D tax credit to enhance its fraud detection capabilities
- R&D Implementation Discussion Paper – AusIndustry has released on its website a Discussion paper on Implementation of the new R&D Tax Incentive. Feedback is sought by the end of December. Members are invited to send any comments to Tax Group.
R&D Tax Credit National Reference Group meeting on 12 August 2011
On 12 August 2011, Donna Bagnall of the Institute represented the Institute at the inaugural meeting of the Research and Development (R&D) Tax Credit National Reference Group (NRG) in Canberra. The NRG is the peak consultative forum for the R&D Tax Credit.
A number of important agenda items were discussed at the meeting, including:
- Finalisation and endorsement of the Charter for the NRG. NRG meetings are to be Quarterly (at least for the first year), and similar to the National Tax Liaison Group (NTLG) meetings.
- Identification and discussion of a number of priority technical issues for which guidance is required, including the concepts of ‘core R&D activities’, ‘supporting R&D activities’, ‘dominant purpose’, ‘at risk’, feedstock expenditure, internal software/internal administration, accounting ‘above or below the line’, and building expenditure. The Institute requested that guidance or rulings should provide clear statements of principle, not merely a series of examples from which it is difficult to discern the principles and apply to other scenarios in practice.
- The threshold question of core and supporting activities costing being required upfront on registration was raised as a key area of concern due to the onerous compliance costs it places on claimants at the registration stage as the eligible expenditure is not typically quantified and broken down in that manner. The Institute supported this concern and referred to the Inspector-General of Taxation’s review of the self-assessment regime which is currently considering the level of burden placed on taxpayers to ensure that it is appropriate in a self-assessment context. The ATO and AusIndustry agreed to consider the issue further to determine how their needs to obtain adequate information on R&D expenditure could be met without undue burden on claimants.