Following a detailed investigation of the experiences of small businesses and family enterprises that have claimed the Research and Development Tax Incentive (R&DTI), the Australian Small Business and Family Enterprise Ombudsman's office is recommending that this important incentive be retained and a suite of reforms are made to the way the system is administered.
This report details how small and family business taxpayers have been subjected to review, examination and audit by the two agencies responsible for the delivery of the program – the Department of Industry, Innovation and Science (AusIndustry) and the Australian Taxation Office (ATO). In all cases, this compliance activity was retrospective and commenced several years after the relevant research and development (R&D) activity was undertaken and the R&DTI refund received. In almost all of these cases, the R&DTI claims were rejected in total.
This has had a devastating impact on the companies, with some saying they face financial ruin. Others have scaled down their R&D efforts in Australia and reduced their R&D staff. For small business, particularly startups, cash flow is critical and access to finance can be challenging. Small businesses undertaking R&D rely on the R&DTI to help fund the development of their innovative new products and services, particularly in the often unprofitable early years.
- Where compliance examinations/audits are necessary, they should take place as close as possible to the first year of registration of a project. Statutory examinations by AusIndustry should not be retrospective beyond one year unless fraud or intentional disregard of the law is reasonably suspected.
- Guidance material needs to be comprehensive, clearer and up-to-date and developed in consultation with small business.
- Substantiation and recordkeeping requirements should reflect commercial practicality with regulator personnel fully equipped to understand and collaborate with small business.
- Small business must be assisted to help identify and retain professional and responsible R&D consultants.