Government tells companies new R&D tax credit will operate from July 1, legislation or not

The Government has told companies hoping to access tax breaks for research and development that its controversial R&D tax credit scheme will start from July 1, despite the fact the legislation supporting the scheme failed to pass the Senate last week.

In a statement from the Department of Innovation, the Government said it would push ahead with a plan to put retrospective legislation in place when Parliament next sits.

However, it is unclear exactly when this will be. The next scheduled Parliamentary session is not until late August, and could be further delayed by an expected Federal election.

“If the R&D Tax Credit legislation is passed after July 1, 2010, it can still operate retrospectively. This means that the legislation can apply to activities undertaken during the 2010-11 income year,” a Department of Innovation spokesperson said in a statement.

“It is not uncommon for tax legislation to operate retrospectively, as long as the legislation is the subject of a clear policy statement by government, and when introduced into Parliament, it clearly states the income years to which it is intended to apply.”

“The important thing is that legislation is in place before taxpayers lodge their tax returns for the income year to which the legislation applies (in other words, that the legislation is in place before July 1, 2011).”

However, the Government’s failure to get the R&D tax credit through the Senate is already creating uncertainty for companies that receive support under the current R&D tax concession, but do not know if they will be eligible under the new tax credit scheme.

Employer groups and tax experts say the tax credit uses much more narrow eligibility requirements than the current tax concession, and have warned R&D activity could drop as a result.

PricewaterhouseCoopers partner Sandra Mason says she is unable to give clients any advice at this stage, other than to wait.

“I think it’s a bit of a wait and see game. There is certainly some uncertainty around what to do in the short-term.”

For example the new R&D tax credit provisions require companies to report separately on “core” and “supporting” R&D and under the complex new “dominant purpose” test introduced under the tax credit (this test means companies hoping to claim on “supporting” R&D will need to prove that work is for the dominant purpose test of supporting “core” R&D).

“Does that mean they should start doing that from July 1?” Mason asks.

Like many in the sector, she hopes the Government will use the opportunity created by the delay to consult further with industry and address concerns around eligibility requirements and the dominant purpose test.

“Towards the end the whole consultation process became very rushed… so we welcome a further opportunity to talk with the Government.”