Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)
Chapter 6 - Improving the administration of the R & D Tax Incentive
Outline of chapter
6.1 Schedule 6 to the Bill improves the administrative framework supporting the R & D Incentive by making information about R & D expenditure claims transparent, enhancing the guidance framework to provide certainty to applicants and streamlining administrative processes.
Context of amendments
6.2 The R & D Incentive is jointly administered by the ATO (under the authority of the Commissioner) and the Board of ISA.
6.3 One of the conditions of an expense giving rise to a notional deduction is that the R & D entity has registered an R & D activity under section 27A of the IR & D Act (for example, subparagraph 355-205(1)(a)(i) of the ITAA 1997).
6.4 Under Part III of the IR & D Act, the Board of ISA may make findings about whether an R & D entity's activities are R & D activities. A finding binds the Commissioner for the purpose of working out an R & D entity's R & D tax offsets (section 355-705 of the ITAA 1997).
6.5 The Department of Industry, Science, Energy and Resources and its staff assist the Board of ISA to perform its functions. The Board and its committees may delegate their functions to a Senior Executive Service employee (subsections 21(1) and 22A(1) of the IR & D Act). The Government has identified that this limit on the delegation power has proved to be impractical and a significant barrier to the Board of ISA carrying out its functions.
Extensions of time
6.6 Part 3 of the Industry Research and Development Decision-making Principles 2011 (the Decision-making Principles) - made under section 32A of the IR & D Act - regulates the ability of the Board of ISA to grant extensions of time under the IR & D Act. This includes extensions of time for registration applications, providing requested information and applications for reviews (see subsection 3.1(1) of the Decision-making Principles).
6.7 The Board of ISA must grant extensions of up to 14 days if it is necessary and may grant a longer period if the applicant's ability to meet the deadline is impaired by events outside the applicant's control (section 3.2 of the Decision-making Principles). These extensions apply on top of the time limits in the IR & D Act (for example, registration applications under section 27D must be made within 10 months of the end of the income year unless extended).
6.8 The Government has observed that very long extensions for registration applications are granted, with applications often made and accepted a number of years after the relevant R & D activities were undertaken. This practice is inconsistent with the nature of the R & D Tax Incentive as expenditure that occurs without a business being aware of the Incentive would have occurred in the absence of the Incentive being available.
Summary of new law
6.9 Schedule 6 to the Bill makes a number of amendments to improve the administration and transparency of the R & D Tax Incentive. These include:
- publishing information about R & D Tax Incentive claimants and their R & D expenditure;
- allowing the Board of ISA to make binding determinations;
- broadening the scope of the Board of ISA's delegation powers; and
- imposing a three-month limit on extensions of time.
6.10 These legislative changes complement other aspects of the Government's reforms to the administration of the R & D Tax Incentive, including additional resourcing for additional compliance and legal activity, and the creation of improved guidance products for claimants.
Comparison of key features of new law and current law
|New law||Current law|
|Transparency of R & D claimants and activities|
|As soon as practicable after the period of two years following the end of the financial year, the Commissioner must publish information about the R & D entities that have claimed notional deductions for R & D activities, including the amount claimed.||No equivalent|
|The Board of ISA may also make determinations about the circumstances and ways in which it will exercise its powers, or perform its functions or duties in relation to the R & D Incentive. These determinations are binding on the Board of ISA.||The Board of ISA may make findings specific to an R
D entity's circumstances, including whether certain activities of the entity are R
Findings are binding on the Commissioner.
|The Board of ISA and its committees may delegate their powers to any member of Australian Public Service staff assisting them.||The Board of ISA and its committees may delegate their powers to Senior Executive Service employees assisting them.|
|Extensions of time|
|The Board's ability to grant an extension of time is subject to a cap of three months on the total extension available, unless the extension is granted to allow an applicant to wait for the outcome of a separate pending decision.||The Board of ISA must grant extensions of time for registrations and the provision of information of up to 14 days if it is necessary and may grant a longer period if an applicant's ability to meet the deadline is impaired by events outside the applicant's control.|
Detailed explanation of new law
Transparency of R & D claimants and expenditure
6.11 Two years after the relevant income year, the Commissioner is required to publish information about the R & D activities of R & D entities claiming the R & D tax offset. This will improve public accountability for R & D claimants and encourage voluntary compliance with the program while balancing these objectives against the potentially commercially sensitive nature of the information being published. [Schedule 6, item 1, subsections 3H(1) and (2) of the Taxation Administration Act 1953]
6.12 The Commissioner must publish the following information:
- the R & D entity's name;
- the R & D entity's Australian Business Number, or Australian Company Number if that is the only number available; and
- an amount representing the R & D entity's notional deductions claimed taking into account any feedstock adjustments for the year.
6.13 As noted in paragraph 5.24, an R & D entity's feedstock adjustment (if it has one) is the lesser of the entity's feedstock revenue or associated feedstock expenditure and is deducted from the entity's notional deductions. If the R & D entity's feedstock adjustment exceeds its notional deductions for the income year, the Commissioner must not publish a dollar figure for the entity but must still publish the entity's name and ABN or ACN. [Schedule 6, item 1, subsections 3H(3) and (4) of the Tax Administration Act 1953]
6.14 The criteria for the publication and the information published are based on concepts defined in the ITAA 1997. [Schedule 6, item 1, subsection 3H(8) of the Tax Administration Act 1953]
6.15 The Commissioner must publish the information as soon as practicable after the end of the period of two years starting at the end of the financial year that corresponds to the R & D entity's income year. It is envisaged that the Commissioner would publish the information of all R & D entities at one time. [Schedule 6, item 1, subsection 3H(2) of the Tex Administration Act 1953]
Source of information
6.16 The publication requirement will not apply in relation to R & D entities that do not lodge income tax returns or otherwise claim an R & D tax offset. In the case of consolidated groups and multiple entry consolidated groups, the information published will be that reported by the head company.
6.17 In determining whether the Commissioner is required to publish information about a specific R & D entity, the Commissioner can only have regard to the information that the entity has reported to the Commissioner.
6.18 Similarly, the Commissioner may only publish amounts that the R & D entity reports, subject only to simple calculations. The Commissioner is not permitted to substitute his or her own assessment of an R & D entity's information for the purposes of determining the figures to be published. However, the Commissioner may verify an R & D entity's identity before publication to ensure that the correct entity is identified.
Correction of errors
6.19 Provision for the correction of errors is an important safeguard.
6.20 The Commissioner may correct errors that are made in a publication in two circumstances: where the Commissioner has made an error and on the initiative of the relevant R & D entity.
6.21 Where the Commissioner has made an error, he or she has power to publish a correction. The correction must be made from the information the R & D entity has reported. [Schedule 6, item 1, subsection 3H(7) of the Tax Administration Act 1953]
6.22 The Commissioner may also make information publicly available that corrects an error that the R & D entity has brought to the Commissioner's attention. [Schedule 6, item 1, subsections 3H(5) and (6) of the Tax AdministrationAct 1953]
6.23 The Commissioner has discretion in deciding whether to publish a correction, including discretion as to the time and form of the publication.
6.24 The Board of ISA may, by notifiable instrument, make a determination about how it will exercise its powers, and perform its functions and duties. However, a determination cannot relate to the exercise of powers, or the performance of functions or duties, in a particular case or in relation to a particular R & D entity. [Schedule 6, item 5, section 31C and subsections 31D(1) and (2) of the IR & D Act]
6.25 Determinations seek to augment the existing program guidance by allowing the Board of ISA to publicly state its position on the application of its functions and its interpretation of the legislation, including the definition of R & D activities or any other administrative matters where specific guidance would reduce the compliance burden for R & D entities.
6.26 This is intended to make compliance easier for R & D entities, as they will be able to better understand what is required to demonstrate eligibility for the R & D Tax Incentive. For example, the Board of ISA may make a determination about the validity of particular forms of evidence for R & D activities, thereby providing registrants with increased clarity on how to best evidence their R & D activities in their registration applications. This would improve compliance and reduce administrative workloads.
6.27 Determinations are generally binding on the Board of ISA. The ability to make determinations binding on itself allows the Board of ISA to provide certainty to R & D claimants and helps ensure R & D entities do not unintentionally misinterpret the meaning of the law. [Schedule 6, item 5, section 31D(3) and (4) of the IR & D Act]
6.28 However, determinations are not binding when an R & D entity seeks a review of a decision. Determinations are intended to operate in a similar manner to a taxation ruling issued by the Commissioner. Determinations are not binding on R & D entities. R & D entities may continue to self-assess their eligibility for the R & D Tax Incentive in a manner that is inconsistent with a determination but risk the Board of ISA contesting their position. If R & D entities believe a determination is incorrect, they may challenge it by seeking a review of a decision made consistently with the determination.
6.29 Determinations are notifiable instruments rather than legislative instruments (see sections 8 and 11 of the Legislation Act 2003). This reflects the fact they are not binding on R & D entities and the long-standing recognition that taxation rulings are not legislative instruments (section 7 of the Legislation (Exemptions and Other Matters) Regulation 2015). [Schedule 6, item 5, subsection 31D(1) of the IR & D Act]
6.30 Making determinations notifiable instruments increases the certainty they provide to registrants. The disallowable nature of legislative instruments would undermine the Board's ability to produce determinations that can be relied on by R & D entities. A disallowance period would create uncertainty about the validity of a determination until that period had ended.
6.31 Determinations are to be co-designed and developed in consultation with relevant stakeholders, including administrators, subject matter experts, tax advisers and peak bodies representing R & D entities by size and sector. Merits review (under Division 5 of the IR & D Act) and judicial review is available for R & D entities in the event of a dispute over a determination. The development process is intended to ensure that determinations are stable and reliable forms of guidance that can be relied upon by R & D entities over long periods of time.
Amending or revoking a determination
6.32 Subsection 33(3) of the Acts Interpretation Act 1901 provides that a power to make an instrument includes the power to revoke or vary the instrument.
6.33 These amendments provide specific circumstances when the Board of ISA must amend or revoke a determination by notifiable instrument. The amendments clarify that this does not limit the application of subsection 33(3) of the Acts Interpretation Act 1901 in relation to the power to make a determination. That is, the Board of ISA may amend or revoke a determination in a broader range of circumstances than those specified in the legislation. [Schedule 6, item 5, subsection 31E(3) of the IR & D Act]
6.34 A determination has no effect to the extent of any inconsistency with the IR & D Act, the Industry Research and Development Regulations 2011 or the Decision-making Principles. If such inconsistency exists, the Board of ISA must revoke or amend the determination to remove any inconsistency. [Schedule 6, item 5, subparagraph 31E(1)(b)(iii) and subsections 31D(4) and 31E(2) of the IR & D Act]
6.35 If the Board of ISA makes a finding specific to an R & D entity, it must be consistent with any relevant determinations. An R & D entity may still challenge a specific finding under Division 5 of the IR & D Act on the basis that the finding is incorrect and the underlying determination is similarly incorrect. An R & D entity may also challenge a finding on the basis that it is inconsistent with a determination.
6.36 In the event that a determination is found to be incorrect in a review decision or must be regarded as incorrect following a review decision, the Board of ISA must revoke or amend the determination so it is no longer incorrect. [Schedule 6, item 5, paragraph 31E(1)(a) and subsection 31E(2) of the IR & D Act]
6.37 The Administrative Appeals Tribunal may review an internal review decision of the Board of ISA. If a determination is inconsistent with a decision of the Administrative Appeals Tribunal, the Board of ISA must revoke or amend the determination so it is no longer inconsistent. [Schedule 6, item 5, subparagraph 31E(1)(b)(ii) and subsection 31E(2) of the IR & D Act]
6.38 The Board of ISA must also revoke or amend a determination that is inconsistent with a decision of a court. [Schedule 6, item 16, subparagraph 31E(1)(b)(i) and subsection 31E(2) of the IR & D Act]
6.39 The Board of ISA and its committees may delegate some or all of their functions to members of the Australian Public Service staff assisting the Board. This expands the existing delegation power that authorised the Board to delegate to Senior Executive Service employees. [Schedule 6, items 7 and 8, subsection 22A(1) and paragraph 21(1)(e) of the IR & D Act]
6.40 The current limit on the delegation power has proved to be impractical and a significant barrier to the Board of ISA carrying out its functions necessary to the operation of the R & D Tax Incentive. These functions include the annual processing of around 12,500 registration applications as well as hundreds of compliance activities. It is unsustainable and impractical for a small number of Senior Executive Service delegates to be responsible for this volume of decision making.
6.41 The expansion of the delegations powers allows additional staff to be delegated responsibility for a number of administrative program tasks. This includes, but is not limited to, high-volume, low-risk functions such as the approval to grant an extension of time to submit applications, or the ability to request information on an application. Prior to the introduction of the current Senior Executive Service limit, a broader delegation power was used effectively and efficiently on a long-standing basis.
6.42 The expansion of the delegations powers also acknowledges the continual growth in the size of the R & D Tax Incentive and the consequent growth in resourcing needed to carry out the functions necessary for the R & D Tax Incentive's effective administration.
Extensions of time
6.43 Extensions of time granted under the IR & D Act may relate to an application to register R & D activities, provide further information requested by the Board of ISA, a form to continue registration as a research service provider or an application for review of a reviewable decision. An extension will apply on top of the time limits in the IR & D Act.
6.44 The Board of ISA must not grant extensions of time under the IR & D Act in excess of three months. [Schedule 6, item 9, subsection 3.2(3) of the Decision-making Principles]
6.45 Restricting extensions to three months mitigates the risk that long extensions granted by the Board of ISA result in applications being accepted a number of years after the relevant R & D activities are undertaken. Such timeframes are inconsistent with the objectives of the R & D Tax Incentive as expenditure that occurs without a business being aware of the R & D Tax Incentive would have occurred in the absence of the Incentive being available.
Further extensions for pending decisions
6.46 This restriction does not apply if the subject matter of the extension relates to a pending decision on another matter. That is, the restriction does not apply if the extension relates to a matter corresponding with the subject of a decision relating to the R & D entity where that decision has not been finalised. [Schedule 6, item 9, subsection 3.2(4) of the Decision-making Principles]
6.47 This allows the Board of ISA to grant an extension in excess of three months where this is necessary to provide a deadline due after the pending decision is made in relation to decisions of the Board of ISA under Division 2, 3 or 5 of Part III of the IR & D Act. This facilitates more administratively efficient outcomes.
Example 6.1 Granting extension pending ISA decision Doppler Dynamics seeks a review of an unfavourable registration decision in relation to the 2021-22 income year. The review (including appeals) is finalised in May 2024.During the course of the review, Doppler Dynamics needs to consider applying for registration in subsequent years for the same ongoing activities subject to the review. It would not be efficient for it to lodge applications that may need to be varied or that may lead to decisions that need to be set aside following the outcome of the review.In these circumstances, it is reasonable for the Board of ISA to exercise its discretion to grant an extension of time until after the pending decision is made.
Amendments to the Decision-making Principles
6.48 The amendments made by the Bill to the Decision-making Principles do not prevent the Decision-making Principles from being amended or repealed by an instrument made under section 32A of the IR & D Act (see subsection 13(5) of the Legislation Act 2003). [Note to Section 3 of the Bill]
6.49 A note is amended to explain that the publication of R & D entities' R & D tax offset claims is not affected by the taxpayer secrecy provisions. [Schedule 6, item 2, note to section 355-50 in Schedule 1 to the Tax Administration Act 1953]
6.50 The simplified outline of Part III to the IR & D Act is amended to reflect the Board of ISA's new power to make determination about how it will exercise its powers, and perform its functions and duties. [Schedule 6, item 4, section 26A of the IR & D Act]
6.51 The amendments commence on the first day of the quarter following Royal Assent. [Section 2 of the Bill]
6.52 The transparency amendments apply to income years starting on or after 1 July 2021. [Schedule 6, item 3]
6.53 The Board of ISA's power to make determinations applies in relation to the exercise of powers, and the performance of functions and duties, by the Board of ISA on or after commencement. [Schedule 6, item 6]
6.54 The amendments to the Board of ISA's delegation and extension of time powers apply to delegations and extension of time decisions made on or after commencement. [Section 2 of the Bill]