SMEs will struggle to access new R&D tax concessions

The Federal Government has applied the screws to the R&D tax concession program, tightening the eligibility criteria to such an extent, that it is likely far fewer SMEs will be successful in accessing any assistance.

Last Friday afternoon, the Government released the draft legislation to the $1.4 billion R&D tax concession program. The key area affecting SMEs is around what qualifies as innovation. Companies have had to demonstrate their R&D activities were both innovative or technically risky. But going forward they will have to demonstrate both features.

This raises the bar very high, says Grey Hayes, from accounts Hayes Knight. “You might have been able to show it was innovative but of low risk of failure and still get the concession. Or conversely you could show it was technically risky but it might not be all that innovative. Now you will have to show that it has a high chance of failure and that it is new in the marketplace.”

He also argues that innovation itself is hard to measure. “I think it will be interpreted as the absence of what was there before. That means they will tend to look at more science based innovation and not the development of ideas.”

Sandra Mason, national R&D leader at PricewaterhouseCoopers, says the mooted changes that now require proof of considerable novelty and high levels of technical risk creates a lot of uncertainty for business and is particularly challenging for SMEs.

“We need more guidance from government as to what these terms mean,” she says.

She also believes this move is against the stated aims of government to get more companies into the program. “This is a big step backwards and will go against the governments stated aims which is to increase Australia’s ranking in the global R&D stakes.”

Other criticism is the definition of “core” activities and “supporting” activities. A proposed test has been introduced whereby supporting activity will be required to be carried out for the dominant purpose of supporting the core R&D. “No one is sure how that will be measured,” Mason says.

This will also case another level of paperwork for SMEs as they split R&D into core and supporting and try and work out what is eligible and what is not.

The good news for small businesses is that the program will shift from a tax deduction model to a credit model. Companies with less than $20 million revenue can claim a tax offset of 45% of their investment in R&D. And companies in a loss making situation can get an immediate refund rather than just adding to their tax loss.

Other changes to the existing R&D program include an expansion of eligible entities to include Australian-owned subsidiaries and permanent establishment of multi-national companies.

But these positive moves will mean nought with the tightening of the eligibility.

The timing of the release a week before Christmas and the fact that companies have until February 5 to submit responses to the draft legislation have also been criticised. “This all looks pretty final with the release just before Christmas and the close of commentary early February. There is a message there.”

And the message is expect the draft to remain unchanged, for the changes to be reflected in the May budget and changes to come into force in the 2010 financial year.