Research and development – A sleeping giant should be woken!

Written by Bob Deutsch, CTA, Senior Tax Counsel

I have previously written about the Research and Development (R&D) tax offset contained in Division 355of the ITAA 1997 (TaxVine No. 27 - 28 September 2018).

That preamble was written specifically in the context of an AAT decision in Moreton Resources Ltd and Innovation and Science Australia [2018] AATA 3378.

Today, I take the opportunity to address more generally the R&D tax offset, particularly in the context of where we currently stand on all this in Australia.

As mentioned in my previous piece, the legislation in this area is complex and convoluted, running as it does to 21 pages of detailed technical content and includes a fairly complex definition of core R&D activities and supporting R&D activities. Whether it is consistent with what was originally intended or with what most might think of as “research and development” is open to argument.

My real concern is that the current legislation and its administration has the consequence that much of the research and development that should take place here is in fact being pursued offshore. Companies have voted with their feet and, in many significant cases decided to pursue R&D activities in countries which have a more friendly commercial and tax environment where they have better opportunities and can achieve better outcomes.

I have no reliable figures to work off in this context, but I do have anecdotal evidence to suggest that many important innovative ideas are being pursued in foreign jurisdictions after the initial seed was developed in Australia, and a large part of the reason for this trend has a great deal to do with more favourable commercial and tax arrangements that might be available in foreign locations.

What is needed is a robust framework that can achieve dual outcomes, namely:
  1. Encourage the genuine R&D activities to be pursued with enthusiasm in Australia;
  2. Prevent the cowboys from manufacturing bogus R&D claims in Australia;
In drawing out this theme, I am not suggesting for one moment that there should be a rush to the bottom where we create an artificial environment where outlandish R&D claims can be made to facilitate minimisation of taxation.

Quite the contrary, what I would advocate for is a strong, robust, but relatively simple research and development offset arrangement which could be pursued in Australia and would give rise to taxation advantages in relation to research and development that occurs within the Australian geographic borders. My great fear is that we are losing vast sums of money to foreign countries where these initiatives that are so vital to a vibrant economy are being pursued outside Australia, even though the initial thinking has emerged from within Australia.

To that end, I am very pleased to see the most recent ATO initiative in the form of the establishment of a R&D Roundtable (the Roundtable), a new forum which will be designed to discuss administrative priorities, opportunities, and emerging issues in the operation of the R&D tax incentive. This Roundtable will be jointly hosted by the Department of Industry, Innovation, and Science and the ATO. 

Whilst this is a laudable initiative, it is purely to develop administrative processes to deal with the existing legislation.
Bob Deutsch, CTA

My problem is more fundamentally with the existing legislation which is, in my view, a total turnoff to almost any company which is looking to develop a research and development platform in Australia. I can think of one company in particular, namely CSL (the former Commonwealth Serum Laboratories) which whilst originating from Australia, has now developed a R&D platform outside Australia which makes what happens in Australia through that company look fairly pedestrian. Clearly, this company has grasped the nettle and reached out to overseas locations to develop a key R&D presence in jurisdictions which are both commercially and tax wise, more favourably disposed to accommodating important R&D developments.

Are there any ideas out there for a better framework which can more fully accommodate such corporate initiatives within the Australian taxation system?

There must be foreign legislative frameworks which can be used as a benchmark for how we might develop our own research and development legislation.

In order to dispel any suggestions of undisclosed bias, I freely concede that my family owns shares in CSL.

Members, we welcome your thoughts via the TaxVineFeedback inbox.


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