It’s been some time since we’ve been in contact so it’s nice to talk to you. We’ve all been patiently waiting for the Federal Government’s response to the ‘Triple F’ Review of the R&D Tax Incentive (the Incentive). The May Budget has come and gone without any announcements. It has now been more than a year since the report was delivered to the Government. As always, we will keep watching that space.
What has been in the public eye in the last week has been some stories regarding the Incentive in the mainstream press (or the fake news, depending on your point of view) and they serve as a stark reminder as to what is of paramount importance in securing your Incentive claims. R&D tax claims have to built on objective contemporaneous documentation – tangible evidence of what R&D was conducted that was captured at the time the work was done. As the legendary Jack Webb was thought to have said when playing Sergeant Joe Friday on Dragnet, “Just the facts. ma’am”. (Interestingly, if you go to the videotape evidence, Joe never uttered that sentence in any episode. This just goes to underlining the importance of capturing and curating the appropriate documents to establish exactly what the facts are.)
One thing needs to be said up front. The Incentive underpins our Australian private sector’s innovation effort and is a key aspect of maintaining Australia as a competitive R&D destination. It must be allowed to continue to do so. The concerns ventilated in the articles discussed here are legitimate and must be addressed but they largely reflect behaviour at the margins. In our thirty-two years of involvement in the program, the vast majority of participants and stakeholders have always sought to do the right thing. Support for these innovators should not be now brought into question because of the poor behaviour of the few.
Turning to the article of 4 July, http://www.smh.com.au/national/investigations/millions-rorted-from-government-rd-scheme-20170703-gx3b79.html, the report sets out the contention that millions of dollars have been rorted from the Incentive by people carrying monikers including ”notorious property spruiker, former bankrupt, disgraced businessman and (gulp) accountant”.
AusIndustry and the ATO needs to pursue inappropriate claims and R&D advisers doing the wrong thing with alacrity. However, it should be noted that the character of the people involved in companies accessing the program is not part of the eligibility criteria. The tax legislation sets out what constitutes eligible R&D activities and expenditure. Entitlement to the support must always be based on these criteria and this must be backed up by original contemporaneous documentation.
In last week’s The Australian, business commentator, Robert Gottliebsen, set out the unfortunate case of a food processing company who had its claims disallowed because the taxpayer had been poorly advised at first instance and did not retain much of the documentation associated with the claim years and was unable to access the documentary support when requested by the ATO on audit: http://www.theaustralian.com.au/business/opinion/robert-gottliebsen/research-and-development-tax-incentives-a-dangerous-hazard-to-small-enterprises/news-story/e5bf0a6964f4d7ad07d30b1f17af2a0f
This case study reminds us that companies must retain copies of their complete technical and financial records associated with their claims for five years after lodgement. It is not acceptable to rely on a third party – an R&D tax agent, an R&D contractor – to be solely responsible for this matter. Too many things can go wrong.
The importance of documentation was again emphasised in a recent AAT case, Rix's Creek Pty Limited; Bloomfield Collieries Pty Limited .
Though the case was concerned with the old R&D Tax Concession provisions, it is directly relevant to companies currently claiming the Incentive.The decision correctly states the following at Paragraph 21: “While the creation and provision of documentation is not a statutory requirement to substantiate the R&D activities, I agree with the submissions of the respondent that documentary evidence is an expected feature of an activity that is systematic, investigative and experimental. Documentation is necessary to record the activity undertaken, its purpose, progress and, of course, the results of the activities and the evaluation of those results. Without such documentation, it is near impossible to establish the progression of the activities undertaken and that the purpose of the activities was to generate new knowledge in the form of new or improved materials, products, devices, processes or services. It follows, that without such documentation, the experimental activity would have limited application or future use.”
What constitutes appropriate documentation is something that needs to be discussed, debated and better understood by the claiming community. We have been approached recently by a number of R&D tax agents and their clients for a second opinion on claims being reviewed by the ATO and AusIndustry. One concern we now have is that the regulators are imposing an unrealistic expectation around the documentation practices maintained by innovative companies in that a deficiency in just one or two aspects of the company under review (when compared to the ideal R&D tax clamant described on the business.gov.au website) can cause the regulator to completely disallow claims at first instance. A subsequent MJA Update will attempt to help frame this discussion as it is becoming clear that work needs to be done to achieve a result that balances the requirements of the regulators with the day-to day realities faced by Australian companies.
In summary, taxpayers cannot contract out of the requirement to capture and curate original contemporaneous documentation. Your claim will not survive risk assessments, let alone audits. And it cannot be emphasised enough that appropriate service provision involves so much more than possessing an R&D Tax Agent certificate. We will also be looking in a future issue at what companies should expect from an R&D service provider. As we will demonstrate, you need to be able to get genuine responses when seeking R&D tax advice. Not bluff. Just the facts.
Should you wish to discuss this matter further, please do not hesitate to contact Kris Gale on 02 9810 7211 or email firstname.lastname@example.org