The Australian Government has for many years provided companies with access to a tax incentive for Research and Development (R&D).
The current program allows companies undertaking R&D activities to claim a deduction of 125% for eligible expenditure. As an additional incentive, if R&D expenditure increases over a running 3 year average this incremental expenditure can be claimed at 175%.
The mining industry is one of the largest claimants of the R&D Tax Concession.
Innovation is evidenced throughout Australian mining operations, whether it be related to new and improved mining products, improved mining extraction and processing techniques, mine design or environmental considerations.
R&D has allowed Australian miners to remain world class at the forefront of safety, efficiency and profitability. From 1 July 2010 the Government intends to abandon the current program and replace it with an R&D tax credit.
The new R&D tax credit represents the greatest change to Australia’s tax-based innovation policy.
Notwithstanding an increase in the base benefit (with no incremental benefit) there appears to be a real targeting agenda on the Government’s part with respect to what should be subsidised as R&D.
The mining sector appears not to be a target for this subsidy and incentive.
The proposed credit is targeted at subsidising those activities and expenditures that would otherwise not have been undertaken and that stand to benefit the Australian economy.
This is to be achieved by tightening of the eligibility criteria in respect to activity and expenditure. As such the credit has not been designed as a broad based tax incentive.
The major points of relevance in the new credit are as follows:
· 45% refundable tax credit where aggregated turnover =<$20m
· 40% non refundable tax credit where aggregated turnover >$20m
· The tax offset will be available for eligible expenditure and also depreciation on plant and equipment used for R&D
· Core Activity — must involve considerable novelty and high levels of technical risk (as distinct from the current threshold of innovation or high levels of technical risk)
· Supporting Activity — must be undertaken for the dominant purpose of supporting core R&D (as distinct from the current test being for a purpose of supporting core R&D)
· Excluded Activities — the list of excluded activities has been amended to exclude them as both core and supporting activities (including trial runs, quality control and other activities pertinent to mining R&D)
· Changing the feedstock rules requiring all costs incurred to be netted off against the value of any direct outputs created
· No tax offset for interest or core technology expenditure
· The on own behalf and at risk rules will still apply (although these have not been readily defined nor clarified in the draft legislation)
· Associates – It will be necessary for payment to be made to an associate in order for such expenditure to be claimable under the offset.
The proposed legislation severely restricts the activities and expenditure that will attract the tax credit.
Take the development of an improved ore processing plant, for example.
This will ordinarily involve design and development, evaluation of existing processes and new technologies, pilot scale testing and production trialling.
Under the existing legislation all of these activities and associated expenditures would be claimable.
The new legislation would prohibit a substantial ambit of the activity as well as the expenditure incurred.
From a product perspective, another example would involve the development of new roof supports, where the only way to determine whether the design is feasible would be to undertake normal mining operations in that area.
Under the existing legislation the mining costs associated with this area could be eligible on the basis that there is a direct nexus between the mining activity and the roof stabilisation.
The costs could be considerable in terms of man hours, equipment depreciation and consumables.
The proposed legislation would also prohibit a substantial level of this activity and expenditure from being claimable.
The proposed changes do little to provide clarity, definitional simplicity and streamlined compliance.
The focus on the Government’s cost to revenue is a significant issue that stands to impact on all entities that undertake R&D in Australia.
It is imperative that the Government be made aware of the likely impact of the proposed changes.
If you are a current claimant, or have the potential to claim in the future, we would be happy to clarify any points raised above, discuss the implications of this legislation on your business, as well as any help identify any opportunities you may be missing out on.
Deloitte will be running breakfast briefings on the proposed legislation in Sydney, Melbourne and Perth in January and February 2010.
You’re invited to an informative, interactive session on what these changes will mean if implemented as drafted.
For more information please contact Jason Crawford on 02 9322 3805 or via email on firstname.lastname@example.org.