Legislation uncertainty

The Research and Development Tax Incentive has recently been causing headaches for some small-business owners.

Innovation is a major driver of growth and prosperity for Australian small businesses.

According to federal government research, innovative small businesses are 60 per cent more likely to report higher income from sales and increased profitability.

Small-business innovation is also critical to the Australian economy. The Australian Innovation System Report found even though innovation-active businesses were only 45 per cent of all businesses, they account for more than 60 per cent of sales and employment.

Today’s start-ups are tomorrow’s industry heavyweights and for the economy to grow, it needs lots of small businesses with big ideas.

The Research and Development Tax Incentive (R&DTI) is essential for small businesses seeking to experiment to turn a new idea into a market-ready product or service.

“Many small businesses rely on the R&DTI and it is vital to have a transparent and predictable system.”

Many small businesses rely on the R&DTI and it is vital to have a transparent and predictable system that works for those businesses conducting research and development.

Unfortunately, my office has received a number of complaints from small and family businesses about unfair treatment in relation to their R&DTI claims by the ATO and AusIndustry.

This prompted a comprehensive investigation by my team, which was recently completed.

The key finding is that many small and family businesses have been subjected to retrospective examinations and audits going back years, which in some cases have resulted in the ATO demanding businesses repay the R&DTI, often with a severe penalty applied.

These small and family businesses have been subjected to stressful audit processes, well after they have received the refund from the ATO.

Indeed, most of these

businesses were genuine in their belief they were undertaking R&D, their claims were totally justified and they had already reinvested the money back into the business.

Small and family businesses reported inconsistent treatment. Some told us they felt somewhat targeted by the ATO and AusIndustry.

Our report found there has been a shift in the interpretation of R&DTI legislation, narrowing the focus and leading to more claims being rejected.

Many of these changes to the landscape have happened without advanced warning, consultation, explanation or education.

Further, it seems valid small-business claimants have been caught up with those who have received bad advice from unqualified and, in some instances, unscrupulous R&D consultants. The real injustice has been that the small business has had to bear the brunt of heavy penalties, even when their consultant is registered with the Tax Practitioner’s Board.

While there are good R&D consultants out there providing quality advice, they are concerned about the uncertainty of the R&DTI program, telling us the goal posts keep moving. It’s impacting their work, their business and the small businesses they are advising.

Both the ATO and AusIndustry have heard these concerns and have pledged to update their approach to R&DTI compliance checks to ensure better communication, guidance and education.

The purpose of the R&DTI is to incentivise businesses to invest in research and development. For Australian small businesses to continue to thrive, it’s critical the government supports investment in research and development to drive innovation and growth.

Kate Carnell AO, Australian Small Business and Family Enterprise Ombudsman

This story first appeared in issue 27 of the Inside Small Business quarterly magazine.

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