A partner in the corporate and international tax division of BDO says the Federal Government’s proposed redraft of the research and development (R&D) tax incentive is systematically flawed. Tracey Murray says those to be most disadvantaged will be Australian manufacturers.
THE Federal Government’s approach to redrafting the new R&D tax incentive is like watching a train wreck unfold before your eyes.
You know it’s going to end in tears, you try and let the authorities know what is about to happen, but ultimately, deep down, you know there is going to be carnage.
In response to criticism associated with the initial draft, Treasury recently released its second draft, noting the objective of the new legislation was to encourage business to conduct R&D activities ‘in addition to’ those they would ordinarily conduct and to ensure the government is not funding ‘business as usual’ activities.
However, even a brief reading of the resulting legislation reveals the new legislation presents a whole new raft of adverse consequences for the Australian business community and appears to have been drafted in such a manner as to discriminate against specific businesses, particularly the manufacturing industry. This potentially unintended discrimination is due to the introduction of two integral concepts to the new legislation.
Firstly, the notes accompanying the proposed legislation and Senator Kim Carr’s own comments indicate the new R&D incentive is intended to direct support away from R&D conducted in a ‘business as usual’ environment. The legislation intends to limit support for R&D activities undertaken in a ‘business as usual’ environment. However, pharmaceutical companies conduct R&D activities as an integral part of their ‘business as usual’ operations. So do most start up companies.
Is the government therefore intending to deny such R&D focused businesses access to the new incentive, as the new legislation clearly states that it is the intention to limit claims made for R&D activities conducted for normal operational purposes? In the event it does provide these types of businesses with access to the new R&D incentive, is it not reasonable to assume that all companies should be afforded the same opportunity to claim for R&D activities that are conducted in a ‘business as usual’ environment. To do otherwise would be discriminatory.
Secondly, by introducing a limitation on the eligibility of supporting activities undertaken in the production of goods or services, Treasury is clearly providing a financial advantage to companies that are not production focused. Companies that are not production focused (such as pharmaceutical companies and many IT companies) will not have this limitation on the activities eligible to be claimed as R&D. It is difficult to understand Treasury’s reasoning behind the inclusion of this very significant limitation on manufacturers’ access to the new incentive.
Pharmaceutical companies generate valuable outcomes in the conduct of their R&D activities which they are able to exploit and sell in much the same way a manufacturer may be able to exploit the by-products of its R&D activities. If Treasury is trying to offset the cost of conducting R&D against the value of the output shouldn’t it uniformly apply this limitation, rather than allow some industries full and unfettered access to the incentive, at the expense of the manufacturing sector?
The burning question on the Australian business community’s lips is: Why is the Labor Government discriminating against the manufacturing industry in the drafting of its new R&D incentive? The manufacturing industry employs millions of Australians and has developed some of Australia’s best-known inventions. Does the government believe this type of industry-based discrimination will encourage more R&D activities by Australian businesses? Surely the answer from the manufacturing sector is an emphatic – No.
As a final note, Senator Carr has, on many occasions, reiterated the government’s intention to introduce the new R&D program as of July 1. Given the second exposure draft has only just been released and introduced some first time concepts (such as a new definition of core R&D activities and ‘business as usual activities’), there is simply insufficient time for businesses to absorb the potential effect of the changes and to make known their concerns.
Australia has traditionally lagged behind other developed nations with respect to its business expenditure on R&D. The unintended consequences that could potentially result from hurried and/or ill-conceived legislation could materially harm Australia’s ability to remain competitive and to leverage off the advantages provided through its abundance of land and natural resources.
Surely the government should not sacrifice the opportunity to implement a world-class R&D tax incentive program for the sake of meeting a deadline.
The opportunity to shape Australia’s future does not come around often.
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