Commentary: R&D tax credit bill punishes success, rewards failure

By Staff Writers
Friday, 14 May, 2010

The final draft of the Government’s proposed revised R&D tax credit legislation was introduced into Parliament yesterday, less than 12 hours after it was made available to members of Parliament and the Australian business community.

With such little time to read and digest the full impact of the bill, what is obvious is that, in its final proposed form, the bill adopts the government’s original intention (per the first draft) of only rewarding failed R&D activities.

At the heart of this policy debacle is the dual ‘R&D activities that produce goods or services’ and the feedstock provisions. Operating in duality, the result of the provision is that if any R&D activity produces any good or service and the output value of the good or service is greater then the cost of producing it, there is no claim.

In the previous two draft bills, the Government indicated it was its intention to produce legislation that did not support R&D activities that would have occurred in the ordinary course of business. This was to be achieved via a limitation on R&D activities conducted within a ‘production’ environment and the need to evidence a ‘dominant’ R&D purpose for such activities to be eligible.

Whilst this may be the Government’s stated objective (and the one used to get the Australian taxpayer onside), the final legislation introduced into Parliament is evidence of the Government’s true objective: to limit the overall level of support it provides to Australian innovators.

It does this by ‘clarifying’ the fact that its new limitation on R&D activities conducted in a ‘production environment’ actually relates to activities that produce a good or service. In clarifying this point the Government states that the activities that fall into this category can range from once-off activities to mass production.

This clarification of terms begs the question – how does this legislation enact the intent of the Government, which is to limit the eligibility of R&D activities conducted in a business as usual ‘production environment’? How can the Government’s intent be achieved when the terminology ‘production-related activities’ does not actually appear in the legislation?

The unfortunate outcome for the Australian business community is that as it currently stands, the legislation gives effect to the premise that the Government does not want to support R&D activities that produce a good or service of value, the result being that only failed R&D activities gain Government support.

In my 25 years as a tax practitioner, I have yet to witness such a drawn out, expensive and ineffective exercise in legislative drafting. The drafting of this legislation has followed a circular process, with the final draft producing the same outcome (reward failed R&D activities) as the first draft – which was widely condemned by both the Australian business community and academics alike.

However, the biggest insult in this whole process has been the Government’s desire for perceived transparency, through broad consultation. Going through the motions of a consultative process does not mean the Government has engaged in a consultative process.

The Government has to listen to the outcome of consultation for it to be a true consultation process, something this Government has failed to do. Introducing this final bill into Parliament less than 12 hours after it was made available has resulted in the Australian business community and the Australian taxpaying community being denied natural justice, by not having had sufficient time to review the bill, digest its effect and have their voice heard via Australia’s democratic process.

As a result, one suspects the bill is not the “bloody good bill” Senator Carr professed it to be. Surely this type of railroading of legislation through Parliament only happens in third world countries.

This commentary was provided by Tracey Murray from BDO International.

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