My Business has spoken with a number of businesses that have used the tax break — most of whom have since regretted ever using the scheme.
Even ATO Commissioner Chris Jordan admitted recently that “R&D has been a problematic area for a number of years”, and noted that in contrast to Australia’s framework, “some countries go through the direct grant route rather than the tax route”.
It comes as the ATO clawbacks of R&D benefits are being formally scrutinised by the Australian Small Business and Family Enterprise Ombudsman.
‘These people scare the s**t out of me’
One business owner that My Business spoke with wanted to remain anonymous for fear of retribution from the government and the ATO, stating “these people scare the s**t out of me”.
“I have been in technology for 40 years: CIO of large global companies and founded my firm in 2001 — i.e. 18 years ago — all with my own money,” the director said.
“A very successful IT services company that created, over the years, a number of innovations and provided great services to the Aussie market.”
He said that clawbacks of the tax benefit received several years ago have already caused him to lay off staff.
“I employed some 20 people for many years, and now I have had to reduce [that] to the bone in order to pay back the benefit received four or five years ago,” he said.
“We created innovations in AI [artificial intelligence] and ML [machine learning], two of the most sophisticated and advanced topical technologies. They believe innovation is not R&D. It didn’t matter how we explained [it] to them, it didn’t matter what structure we used to explain what we did, it was never sufficient.”
He added: “It is a disgrace. The government and AusIndustry has done irreparable damage to our industry sector and it will take us years to recover.”
According to the business owner, he has previously expressed his concerns to the minister, and that others have also drawn government attention to the problem, all to no effect.
“The media has been beating this drum for a while. Innovation Australia has done the same. AIIA has done same,” the director said.
“I am glad the ombudsman will look into this: the most atrocious prosecution of an industry sector in years.
“This is done at the time New Zealand has launched a tech-supportive R&D scheme, the UK and the USA the same, at the time when AI/ML are the most prevalent technologies available and to change significantly the way we all work.”
Not an isolated example
My Business has been approached by several other business owners in a similar position who didn’t want to speak publicly at all about their experiences, again for fear of retribution.
Their concerns about these clawbacks are raw and having considerable impacts on both their business and themselves as a result of the added stress.
Outsourcing platform Airtasker confirmed to My Business in December last year that it too has faced demands to repay funds, with CEO Tim Fung outlining how a 24-month review of its use of the benefit — which of itself “took significant resources away from further development” — ultimately came down against it.
Meanwhile, the co-owners of another business admitted that they have given up on using the incentive altogether, because the costs associated with applying for the benefit, including hefty external consulting and advisory fees, meant there was little actual financial benefit left for their business.
Self-assessment means registrants are responsible: DIIS
Asked to comment on industry concerns about the approval process and subsequent clawbacks — often years later — a spokesperson for the Department of Industry, Innovation and Science told My Business that the onus is on businesses to ensure they are eligible to claim the tax benefit, and that registrations “may be reviewed by AusIndustry (on behalf of Innovation and Science Australia) at a pre-registration or post-registration stage”.
“The R&D Tax Incentive (RDTI) is a self-assessment program, which means that registrants are responsible for assessing whether their company and the R&D they are conducting meet the eligibility requirements of the program,” the spokesperson said.
“Companies are selected for review using a risk-based approach, which covers a cross-selection of businesses from all sizes and sectors participating in the program.”
They added: “It is important to note that registration of research and development activities with AusIndustry does not mean those activities are eligible under the program.”
Speaking about the potential for confusion between involvement of multiple government agencies in the process, the spokesperson confirmed that “AusIndustry is responsible for determining the eligibility of R&D activities [and] the ATO is responsible for assessing the claimed expenditure”.
But they insisted that the department, acting on behalf of Innovation and Science Australia, and the ATO “jointly administer the R&D Tax Incentive and work together to maintain the integrity of the program, while encouraging ongoing investment in research and development in Australia”.
“The ATO and AusIndustry work together to help companies get their claims right up front by providing guidance, including flagging areas of concern and common mistakes,” they said.
How many claims are actually made for the tax benefit?
According to the spokesperson, 13,414 applications for the R&D Tax Incentive were registered in the 2016–17 financial year, the most recent for which data was available.
That number was steady from the prior two financial years (13,660 in FY2016 and 13,130 in FY2015), but up on the volume received in the 2014 financial (11,877).
Around 89 per cent of applications received in 2016–17 were registered within 10 days, figures provided by the department said.
A question about how many staff are involved with processing these registrations was not directly answered, with the spokesperson stating only that “AusIndustry administers the RDTI program through a network where staff undertake advice, guidance and compliance activities directly engaging with businesses”.
According to the official The R&D Tax Incentive: A guide to interpretation, eligibility for the benefit is restricted to core research and development activities where there is systematic (and scientific) progression of work, the outcome cannot be known or determined and where their purpose it to generate new knowledge.
There are also guidelines around supporting R&D activities that directly contribute to the above.
Meanwhile, the activities expressly exempt from eligibility for the benefit are:
- Market research, testing or development, including consumer surveys and sales promotion
- Prospecting for minerals or petroleum
- Management studies/efficiency surveys
- Research in the arts, humanities or social sciences
- Commercial, legal and administrative aspects of patenting, licensing etc.
- Compliance activities to meet statutory standards or requirements
- Reproductions of a commercial product or process
- Developing or adapting computer software where the dominant use is by the developer or associated entities
The full PDF guide can be accessed from the Department of Industry, Innovation and Science’s website, as can the R&D Tax Incentive overview, eligibility and application details.