Companies tangling with claiming the government’s troublesome research and development tax incentive (R&DTI) have new hope of a better system after a scathing review of the process by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO). The review contained no less than 24 recommendations to the program which it branded overly complex, open to misinterpretation and detrimental to business instead of beneficial.
The findings by ombudsman Kate Carnell signal the ball is well and truly rolling towards true clarity for the R&DTI’s more than 13,000 claimants (including Commercial Property Guide). Introduced in the early 1980s and overhauled in 2011, the R&DTI was designed to foster innovation via a financial boost. Instead, it now instils fear due to so many claims having been rejected in the past few years and placed a multitude of companies under extreme financial duress due to hefty fines.
The current situation bubbled up after a cost blowout saw R&DTI claims climb around $1 billion more than the $2.5 billion planned. The federal government ordered its own review in 2016 to investigate if the tax break was being correctly allocated, and in the last three years the Australian Tax Office (ATO) and AusIndustry – the two agencies responsible for the delivery of the program – stepped up R&DTI audits.
This crackdown resulted in numerous R&DTI claims being deemed ineligible, often several years after lodgement and refunds received, with dire results. Many companies were financially ruined and forced to close while others had to lay off staff, abandon expansion plans and scale back research and development. Concerned by reports the government had clawed back $200 million in the 2018 financial year from R&DTI claimants, as well as other negative feedback, complaints and the number of cases brought before the Administrative Appeals Tribunal (AAT), Ms Carnell launched the review late last year.
Complex and confusing
The ensuing report into the program highlights a lengthy list of problems, mostly stemming from inconsistent administration that has had devastating impact on not only the big end of town but a multitude of small and family-run businesses – the very people the scheme was designed to help.
A major problem identified in the report was the extensive time frame of the claims scrutinised during audits. “In all cases examined by the ASBFEO review, compliance activity was retrospective and commenced several years after the relevant research and development (R&D) activity undertaken and the R&DTI refund received. In almost all cases, the R&DTI claims were rejected in total,” the report revealed.
The review also found:
- the R&DTI scheme is exceedingly complex
- the way in which the ATO and AusIndustry operate is not properly integrated
- guidance material provided by the two bodies is “fractured and incomplete”.
- compliance audits have been “reactive” and “lack the commercial understanding of how small businesses operate”, “assume guilt” and are “resource intensive”. The results in long lag times in decision making which threatens the viability of the business being audited.
- the R&DTI requires a more customer-focused approach by both AusIndustry and the ATO
Gerry Frittman, managing director of R&DTI specialist firm TCF Services, said while Ms Carnell was bound by legislation to limit her review to small businesses with a turnover of $5 million or less, the findings were equally relevant to large companies. “It’s supposed to be an industry assistance program not an industry resistance program,” said Mr Frittman. He also praised the review findings as positive and realistic. “We share the ASBFEO’s grave concerns about the way the R&DTI is run and its negative impacts.”
The ASBFEO recommendations centred on four themes, and stated that these were based on the “importance of the characteristics of good governance including transparency, clarity and certainty to ensure that companies are encouraged to undertake R&D activities and claim the R&DTI”.
- Compliance examinations and audits should take place as close as possible to the first year of registration of a project - and should not be retrospective beyond one year
- Guidance materials needs to be far more clear, comprehensive, and current. They also need to be developed in consultation with small business.
- Those carrying out audits must be fully equipped in understanding and collaborating with small business.
- Substantiation and record-keeping requirements should reflect commercial practicality with regulator personnel fully equipped to understand and collaborate with small business
Mr Frittman said he is hopeful attention will now be given to those companies financially ruined by ATO penalties meted out for what were deemed ineligible claims.
“It will be interesting to see if the scheme administrators now take up the recommendation of redressing the claimants that were wrongly subjected to heavy audit activity with demands to pay back four to five years of receipts,” Mr Frittman said. “Or whether it is too late as they have all been forced into administration or lost their business impetus as an outcome of the process.”
# Read the 51-page report by Australian Small Business Ombudsman Kate Carnell
# Gerry Frittman Managing Director TCF Services