The intersection of taxation and innovation in Australia

Incorporation of the concession within the GST as an Indirect Tax Concession

There have been a number of areas receiving concessional treatment with the introduction of the GST legislation as follows:

1. Wine Equalisation Tax ;
2. Diesel Fuel Rebate;
3. Luxury Car Tax;
4. GST Free for supplies of health and education;
5. Some food GST free; and
6. Student book subsidy.

Each of these GST treatments or GST adjustments represent examples where the Government has been prepared (or was obliged) to make changes to the standard GST treatment for reasons based broadly on social equity, national health or environmental grounds.

R&D directed to accelerating national wealth creation through commercialisation of innovations stands, we believe, on par with the above listed examples as a public and economic good. We believe that the existing Concession under the Income Tax Assessment Act 1936 ("ITAA") should be brought under the GST legislation as follows:

• introduce a concessionary input tax credit based on eligible R&D expenditure identical to the current concession;
• include a notional credit for R&D salary & wages (currently outside GST scope); and
• ensure the value of the concession is maintained, if not bettered.

The benefits are as follows:

1. likely retention of the existing legislative framework;
2. continued application of the case law and precedents;
3. immediate cash flow benefits for both profitable and loss companies;
4. "merged" compliance costs. All enterprises must in the future comply with the GST. Those who conduct R&D would make R&D input taxed concession claims as allowable adjustments, applying similar administrative requirements;
5. flow on benefits of improved "real-time" R&D accounting in order for companies to claim any adjustment in a timely manner. This would improve their project management skills and be of cumulative national benefit;
6. provide comprehensive means of near real time measure of national R&D expenditure (limited to amounts claimed);
7. provide an option to be an either/or concession with companies electing which scheme they will claim under (ITAA or GST); and
8. eligibility could be confined to companies/public trading trusts and thereby exclude public sector enterprises. The latter would then be at a competitive disadvantage if they do not proceed to incorporate (this may act as a flow on benefit to force universities and the CSIRO to have a more commercial outlook).

Finally, we note that the outcomes of the Ralph submission may alter the company tax rate and/or the basis of taxing (profit or a cash flow surrogate), and this outcome may drive further need for change to the current Concession.

Administrative Implications

It is proposed that the existing process of registration be maintained. We are of the view that it is important that some formal registration process be maintained as it serves an important purpose of assisting to ensure the integrity of the concession.

Under the above periodic claim process, taxpayers would effectively be claiming the concession throughout the year. Currently, companies can only submit an Application after the end of their financial year. There is a risk therefore that companies may claim a concession during the year for activities that may be ineligible. Whilst there is currently an advance registration process, taxpayers using this process must still submit an Application, which is a duplication of effort.

As the information required for an Advance Registration is similar to that required for an Application. Advance Registration might act as the formal registration of activities, doing away with the current post year end Application. This requires forward planning of R&D activities but will not cover activities commenced during the year that were unplanned. A mechanism to allow such activities to become registered would be required.

Incorporation of the concession within the PAYG system

If the concession remains under the Income Tax Assessment Act, the concepts expressed above can also be applied to the proposed new Pay As You Go system albeit with some modifications.

By allowing a periodic claim for the concession through the PAYG system, profitable companies are able to offset any tax payable against the concession thereby achieving a reduced periodic tax bill. However, modifications to the legislation would be required to allow cash refunds for R&D expenditure by taxpayers in loss situations. This might be limited to particular criteria such as:

• taxpayers determined to be "small" by reference to their "likely tax" (as currently calculated);
• only taxpayers with a likely tax less than a specified threshold;
• only taxpayers with a likely tax less than zero; and
• by level of R&D expenditure.

The references to registration made above apply equally here as do the list of benefits provided.