AusIndustry recently published four Specific Issue Guidance products concerned with the R&D Tax Incentive (the Incentive) and the overall message of the four documents is something we can all agree on. In accessing the R&D Tax Incentive (the Incentive), taxpayers must follow the law. Fair enough, we say, but when we unfurl the parchment contained in the metaphoric bottles, the message starts to get somewhat blurry. In this MJA Update, we try to distill the essence of this guidance.
The guidance addresses four areas of industry:
· Software development
· Farming (including plantations, orchards, vineyards and fibre growing)
· Mining, specifically mining flowsheets and mine design
· Building and construction
A Matter Of Expectations
In approaching the material, expectations need to be set. Guidance material needs to be considered in terms of audience, purpose, content and emphasis.
Let’s consider the first three under this heading. The last section will speak to the matter of emphasis as this is where we wish to raise our concern that the material is far too heavily skewed to what doesn’t qualify under the Incentive and may well end up acting as a disincentive to companies wanting to undertake R&D.
Audience – The products indicate that their target audience is companies and their tax advisers. We would submit that a third critical audience for this material is AusIndustry assessors.
In its current form, the material is quite dense and it certainly is not seeking to promote the program so it is not a good fit for companies wishing to establish whether they have claims in the identified sectors. We note that the Industry Sectoral Guides published around four years ago, some of which were very useful introductions to eligibility under the Incentive, have been removed without notice. (We understand that they will be restored in an altered form at a later stage). The new material could only have meaning for a potential claimant company if read in conjunction with something like the Sectoral Guides so their absence should be addressed as a priority. We will return to the potential impact on assessors in the next section.
Purpose and Content – The stated purpose is to help companies and their advisers get claims “right”.
It can be argued that this is an unrealistic purpose in the context of taxation self-assessment. Claims are influenced by many factors such as availability of documentation, the understanding of personnel and access to meaningful advice. These factors go into determining the scope of claimed activities and expenditures and it cannot be said that there are black and white “right” answers when making claims.
As indicated above, the best way to ensure that claims are allowable is to follow the law. Guidance material should amplify how to do this by way of contextual explanation of the legislative requirements, accompanied by illustrative and comparable examples.
The published material relies on extensive quoting of the legal provisions along with some contextual discussion. Examples, however, are very thin on the ground and this underlines the need for the prompt restoration of the Sectoral Guides. Further, the material strays into matters that are the concern of the Australian Taxation Office such as feedstock adjustments, core technology expenditure and expenditure not at risk. These discussions take the focus away from the eligibility of R&D activities which is the responsibility of AusIndustry and the appropriate purpose of the guidance material.
You’ve Got To Ac-Cent-Tchu-Ate The Positive
Or so the classic tune went by Johnny Mercer And The Pied Pipers back in 1944. And it’s good advice when you are trying to incentivise a desirable activity, in this case, Australian R&D.
Putting it bluntly, with the exception of the farming guidance, the AusIndustry material does the complete opposite. The products continuously reinforce what doesn’t qualify as R&D to the point that a potential claimant coming to the material for the first time would be significantly deterred from claiming.
For example, take the mining guideline. Under the heading ‘Activities that are eligible under the R&D Tax Incentive’, the guidance details ten areas where one would not expect to find eligible R&D core activities (e.g. qualification testing; separation techniques; metallurgical testing), the fact that eligibility does not apply to projects, only activities, and the two areas subject to legislative exclusion. The only undertakings identified as potentially eligible are remotely controlled mining technologies, geo-sensing techniques, biomining bacteria and experimentation with new exploration and drilling techniques. These activities are simply mentioned without any further analysis and they are swamped by the material focused on ineligibility.
If we go back to the audience matter raised above, the material leaves an overwhelming impression that the four industry areas rarely involve eligible R&D. Further, it’s an impression likely to be carried into audit situations by Ausindustry assessors. This contradicts the legislative reality and surely can’t be the intention of AusIndustry.
We strongly urge AusIndustry to withdraw this material with a view to publishing improved guidance with a better balance, alongside the revamped Sectoral Guides.
A Final Word About ‘The Project’
No. We are not diving in to the Steve Price controversy on Network Ten’s flagship current affairs program.
We want to comment on the position taken in the material that projects are not eligible under the Incentive, only activities are. This is correct but the discussion seems to completely ignore the reality that AusIndustry requires taxpayers to register their activities as R&D projects. The risk is that assessors are now refuting the eligibility of activities on the basis that the taxpayer has detailed eligibility arguments at a project level only. Yet, in no large measure, this is precisely what the registration application asks companies to do. Again, we suggest that the ‘projects are not eligible’ discussion needs to be withdrawn and reconsidered so as to assist taxpayers as to how to demonstrate eligibility at an activities level at the same time as registering the claim in terms of R&D projects.
But, Wait, There’s More
In the next MJA Update, we will analyse the three ‘applying the law’ products that were published at the same time as the guidance products and see what is to be found in those bobbing bottles.
In the meantime, should you wish to discuss this matter further, please do not hesitate to contact Kris Gale on 02 9810 7211 or email email@example.com