The Federal Government has been urged to relax a compliance regime for revised research and development tax concessions amid concerns they could adversely impact smaller innovative businesses.
The Tax Laws Amendment (Research and Development) Bill 2010 passed through Parliament this week, following two-and-a-half years of delays and deferrals.
The concessions came into effect retroactively from July 1 this year.
The Federal Government estimated it would hand out $1.8 billion in tax credits to approximately 5500 firms over four years to help them conduct research and development in Australia.
Under the revised legislation, small companies with a group annual turnover of less than $20 million could claim a 45 percent refundable tax credit in quarterly payments, up from a previous $5 million cap.
Larger companies would be eligible for a 40 percent non-refundable credit - equivalent to a 133 percent concession.
But some of those who championed the scheme had become concerned small companies would now be worse off as the Government demanded more information during its claim assessment process.
"It's a better scheme and a better potential outcome but what they're going to make people do is jump through a whole bunch of hoops," former Australian Information Industry Association chief executive Ian Birks said.
The revised laws also meant AusIndustry retained scope to make binding decisions on definitions for core and supporting research and development activities for all industries and on a case-by-case basis.
Concerns were raised by industry about the proposed exclusion from the scheme of research activities deemed related to production of software or goods, and modification or customisation of existing software for day-to-day internal use.
The production exclusion was expected to reduce the range of research and development activities eligible for the concession by 15 to 20 percent across all industries.
New tax regime
With legislation finally passed, AusIndustry and the Australian Taxation Office (ATO) had begun working with accounting firms and large companies to determine the type and amount of information required from companies in order for them to be deemed eligible.
The former tax regime required companies to list the technical objectives of their research and development project, with information split into experimental or directly related activities.
Those who received the concession would be required to front more information should they be audited by the ATO.
The proposed compliance regime for the revised R&D concessions, however, required companies to list their projects under five categories covering core research and supporting activities.
Concerns were raised about the cost and time needed to furnish authorities with more information.
"The government has all the power to ask for what it wants, when it wants but it also has the discretion to ask how much information it needs at the application stage," Michael Johnson Associates managing director Kris Gale said.
"We believe proposals to match the law with asking questions at that level of question is too much at the application stage.
"You can imagine that the application could end up saying for each project, companies have to split their projects into five separate categories and there could be consequences if they get that wrong or put it in the wrong place."
Industry hoped to sway AusIndustry and the ATO on how application forms and R&D concession guides would be worded to make self-assessment easier for small companies.
The hope was to avoid the need for software developers and other small firms to pay large consulting firms in order to assess their eligibility for the R&D scheme.
"The current regime is workable to the extent that small companies could do it themselves without hiring an adviser," Birks said.
"You want small, emerging start-up companies to be able to manage the process themselves [rather] than having to appoint specialist advisers."
AusIndustry's general manager for research and development David Wilson said the revised R&D tax breaks were not wholly different to the previous scheme.
He said they overtook some of the more "onerous" administrative requirements of the old regime.
Toll on research
Despite provisional arrangements, the year delay in passing the legislation had been seen as one cause for continued departures of research labs from Australia by the likes of Avaya and Symantec.
In many cases, the delay left city and shire councils to incentivise multinationals to stay and spend more money.
According to the Department of Innovation, Industry, Science and Research, the start date deferral would ultimately have an estimated negative impact of $310 million this financial year 2011-12.
It would return a positive financial impact of $270 million the next financial year.
Gale said the delay had been vital for the Federal Government to assess the potential eligibility of certain verticals, including software development.
GDP percent increase
Federal Greens MP Adam Bandt used the bill's passage to reiterate calls for a joint increase in private and public R&D spending to three percent of Australia's gross domestic product, or approximately $38,520 million based on figures for the 2009-10 financial year.
According to the Australian Bureau of Statistics, the nation spent 2.2 percent of its GDP on research and development in 2008/2009, amounting to $27,740 million. Approximately 60 percent was contributed by local businesses for the year.
A spokesman for Innovation Minister Kim Carr would not confirm whether he would back such spending increases.