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12 December 2019

Ombudsman recommends sweeping changes to R&D Tax Incentive administration

The Australian Small Business and Family Enterprise Ombudsman Kate Carnell is recommending a suite of reforms to the administration of the Research and Development Tax Incentive (R&DTI), as part of a comprehensive report released today.

The report makes 24 detailed recommendations in relation to the following key themes:

  • where compliance examinations or audits are necessary, they should take place as close as possible to the first year of registration of a project 
  • guidance material needs to be comprehensive, clearer and up-to-date and developed in consultation with small business
  • agency record keeping requirements be simplified and take into account commercial practicality for a small business
  • small business must be assisted to help identify and retain professional and responsible R&D consultants.

“It is clear from our investigation that many small and family businesses rely on the R&DTI to help fund innovation,” Ms Carnell says.

“That’s why it is vital to have a transparent and predictable system that works for those businesses conducting research and development.

“We found many small and family businesses were subjected to examination and audit by the two agencies responsible for the delivery of the program – the Department of Industry, Innovation and Science (AusIndustry) and the Australian Taxation Office (ATO).

“In all cases, this compliance activity was retrospective and commenced several years after the relevant R&D was undertaken and the R&DTI refund received and spent.

“Often these affected businesses were required by the ATO to repay the R&DTI in full, with a severe penalty applied.

“This has had a devastating impact on the businesses involved, with some saying they face financial ruin.

“Others have discontinued or scaled down their R&D efforts in Australia and reduced their R&D staff.

“Most of these small and family businesses were genuine in their belief they were undertaking R&D; their claims were totally justified and they had already invested the money back into the business.

“Small and family businesses my office spoke to reported inconsistent treatment, while R&D consultants expressed concerns about the uncertainty of the R&DTI program and the changing goalposts in the way it is administered.

“Our report found there has been a shift in the interpretation of the R&DTI legislation, narrowing the focus and leading to more claims being rejected, particularly in the area of software innovation.

“Both the ATO and AusIndustry have heard these concerns and have pledged to update their approach to R&DTI compliance checks to ensure better communication guidance and education.

“This needs to be embedded consistently across both agencies’ networks and the ATO and AusIndustry should apply this updated approach retrospectively to the businesses that are in the midst of an audit or examination.

“The purpose of the R&DTI is to incentivise businesses to invest in research and development.

“For Australian small businesses to continue to thrive, it’s critical they are supported in their R&D endeavours to drive innovation and growth.”