Draft legislation will reduce R&D business expenditure, says Deloitte
Australian entities will consider moving R&D operations offshoreDOWNLOAD
The long awaited draft legislation for the new Research & Development (R&D) Tax Credit* released last Friday by the Federal Government will dramatically reduce support for business expenditure on R&D in Australia, according to professional services firm Deloitte.
Serg Duchini, Deloitte National Leader of the Taxes and Incentives group, said the Federal Government does not seem to have heeded the advice of industry during the submission phase.
“There has been extensive consultation, discussion and comment between the Government and corporate Australia, industry bodies and associations. Despite this, the Government has largely ignored this feedback. This is extremely disappointing,” Mr Duchini said.
“Overwhelmingly, the themes inherent in the submissions to Treasury favoured the continuation of a broad based tax incentive, clarity in R&D concepts and definition that would continue to promote R&D in a practical and pragmatic way.
“The Treasurer stated that the new credit is aimed at boosting investment in R&D and supporting jobs. Upon reading of the draft, it is apparent that it will be much more difficult for potential claimants to make use of the new credit.”
Mr Duchini underlined that the proposed definition of R&D has been tightened, as expected, but to a level that will make it extremely difficult for entities to qualify.
“In addition, the expansion of the feedstock rules, the reduction in the ability to claim expenditure on supporting activities and the treatment of software will result in a R&D credit that will provide little support for R&D undertaken in a commercial context. There is no benefit in having an enhanced credit value if entities do not satisfy the definition of R&D,” he said.
Mr Duchini warned that foreign corporations will really question whether they should invest in R&D in Australia.
“I would expect that we will also see a number of Australian-based entities give real consideration to moving their R&D operations offshore. This contradicts what the Treasurer has said about boosting R&D investment and supporting jobs. The definition of R&D for Australia will put us out of alignment with the rest of the world and Australia’s international competitiveness stands to be eroded,” Mr Duchini said.
According to Mr Duchini, for entities that do undertake eligible R&D, the administrative requirements and therefore compliance cost will erode the potential increase in any available benefit.
“It was hoped that after 24 years, the current Government would provide business with a workable and useful R&D incentive that avoided the pitfalls of the current R&D Tax Concession. What we have got is an unworkable definition that lacks clarity and simplicity and which will result in greater subjectivity and uncertainty,” Mr Duchini said.
Submissions on the draft legislation and explanatory materials are requested by 5 February 2010.
Mr Duchini has encouraged the business community to rally and oppose the credit in its proposed form.
“In the interests of contributing to technological advancement and economic prosperity for Australia, it is important to have broad based incentives that will promote and increase business expenditure on R&D,” Mr Duchini concluded.
Legislation is expected to be introduced to Parliament in early 2010 with an effective start date of 1 July 2010.
* The draft legislation is the latest piece in the innovation policy puzzle that started back in 2008 with the Cutler Review which then led to Powering Ideas, announced in the 2009-2010 Federal Budget and was followed up with the Government’s Consultation Paper, The new research and development tax incentive, in September 2009. In response to the Consultation Paper Treasury received 197 submissions on the proposed credit, the way it should operate and perceived flaws with the Government’s suggested policy.