By Senior Tax Counsel Bob Deutsch, CTA
Concessions in respect of research and development (R&D) in the form of either offsets or deductions have been an integral part of the Australian tax framework for many years. The degree to which such concessions have succeeded in securing an objectively assessed positive outcome for Australia is difficult to evaluate but it seems that neither tax administrators nor taxpayers are particularly pleased with the current settings.
In international terms, Australia lags behind most of our main competitors. The most recently available figures suggest that Israel and South Korea are the leaders, each with over 4% of GDP being spent on R&D. Laggards include Australia, New Zealand, Canada and the UK all under 2%. The US is closer to 4% and the OECD average is around 2.5%. Most alarmingly, the Australian R&D spend as a percentage seems to be going down with each passing year.
In terms of the case history, there have been many well documented stoushes both before the AAT and the Federal Court (see by way of example Moreton Resources Ltd v Innovation and Science Australia  FCAFC 120 as to the meaning of “core R&D activities”; Rix’s Creek Pty Ltd; Bloomfield Collieries Pty Ltd v Innovation and Science Australia  AATA 645 especially as to documentary requirements and DZXP, KRQD and QJJS v Innovation and Science Australia (2017) AATA 576 especially as to the importance of claiming under the name of the correct entity).
The press (The Australian, in particular) have also weighed in from time to time with much coverage of alleged ATO mismanagement of R&D claims.
More significantly, it can hardly be said that Australia has somehow become an R&D hub as a result of our attractive tax environment for R&D activities.
Why is it that a significant tax concession has not translated into a significant boost in R&D activities in Australia? The answer may lie in a number of places – the concession is too small; the concession is too complex; the concession is too cumbersome in its administration. All those matters I think may play a part.
Solutions attempting to fix some of these issues have proved to be elusive and I think it is time to revisit the whole matter.
In particular, why do we provide a broad concession that tries to target all and any type of R&D? Countries that have been successful in this space have been more directly targeting specific types of R&D and it seems to me that that is the direction we should move in. Why not dedicate our limited resources available through tax expenditures to targeted R&D areas in respect of which we could have a more coordinated plan of attack. Two areas immediately spring to mind:
1. The first is medical research. This is an area in which Australia has shown a propensity to excel in, at least at the initial stages. How often have we heard that medical breakthroughs have originated in Australia but could only be developed, due to a lack of local research funding, overseas. Two of our greatest companies CSL and Cochlear have been responsible for many medical breakthroughs but, all too often, development has had to be undertaken and/or completed overseas. This area could be targeted to ensure that further development stays here and is not lost to Australia.
2. The second is far more controversial and I make this suggestion in a totally neutral non-partisan, non-political fashion – how about targeting R&D into renewable energy. Research that might allow us and the rest of the world to effectively harness and store renewable energy in such a fashion as to make renewables a formidable, price efficient, genuine alternative to traditional fossil fuel-based energy sources. Clean air, whatever your view on climate change might be, is a desirable objective that could be funded through such an initiative. It is not unrelated to the suggestion I make above – after all it is a health issue as much as it is an environmental one.
As it is, our R&D policy tries to be all things to all people and, in the long term, that is a policy that is doomed to inevitable failure. We need to be more targeted in our approach and play to our strengths – our strength in medical research has been proven over many decades; our strength in renewables is largely untested but we have sunshine, wind and plenty of space to exploit.
As you all know I am no scientist – tell me if all this is nonsense. As things stand, with our current approach we seem to be making little, if any, real headway. As always, I welcome your thoughts and comments via the TaxVine feedback inbox.
On a separate note, I look forward to meeting as many of you as I can at the Institute’s Tax Summit 2020 next March. I understand it’s going to be a huge event that combines our National Convention with NSW Tax Forum. It will be an excellent opportunity to network and attend the technical sessions.
The Tax Institute is combining two flagship events (National Convention and The NSW Tax Forum) into what will become the most significant tax program for tax and accounting professionals in the region.
This event is one members and non-members alike won’t want to miss. This is ground zero for our profession; the central point from which everything else revolves around.
There will be more than 60 sessions delivered by local and global tax experts, across SME, Corporate and Hot Topic streams. The Tax Summit also includes keynote sessions and four new streams: Professional Practice, Emerging Leaders, International and Technology.
Not to mention National Convention’s hugely popular networking events, the Welcome Reception, and Gala Dinner featuring The Tax Adviser of the Year Awards.