Proposed R&D tax changes & mining

The mining industry could be hit hard by changes to the taxation treatment of Research and Development expenditure proposed in a consultation paper released by the Commonwealth Treasury recently.
Natalie Milne said Australian miners were significant claimants of the Government’s R&D tax concession program, but that taxation support could be restricted if proposed limits on supporting activities outlined in the consultation paper were adopted by the Federal Government.
In its Federal Budget in May, the Government announced an increase in benefits available to companies investing in R&D, by moving the R&D tax concession from a tax deduction to a tax credit scheme. However, along with the increase in benefits was a proposal to restrict supporting activities claims which make up a significant proportion of R&D expenditure claims.
“If they are adopted, these restrictions will significantly undermine the benefits available to many mining clients,” Milne said.
“Unfortunately, the consultative paper itself offers little or no guidance how and why various conclusions were reached.
“It is apparent from the consultative document that Treasury has a limited understanding of the commercial drivers which prompt companies to undertake R&D activities, but has an overarching desire to cut into eligible expenditure.”
Currently mining companies are eligible to claim R&D expenditure incurred in undertaking R&D trials, despite the fact that these costs are also incurred as part of commercial operations (that is, drill and blast costs, overburden removal cost, etc). If is often essential to incur such costs in order to demonstrate the overall success or failure of the R&D activities.
By limiting eligibility, the options proposed by Treasury to rein in R&D expenditure may provide insufficient incentives for companies to undertake R&D activities, and could potentially cause a company to reconsider claiming the R&D tax credit due to the administrative burden associated with claiming compared to the financial benefit it would receive.
Milne said the proposals also penalised companies for successful R&D activities.
“Any commercial success or return on investment that results from successful R&D activities would dramatically and materially reduce any incentives the company maybe otherwise entitled to, compared with unsuccessful R&D activities,” she said.
“This has the potential to reward and encourage pure research that has unproven commercial applications - research that is better supported through the provision of grants or undertaken by universities.
“These changes are obviously designed to ensure the proposed R&D tax credit program is revenue neutral for the Government, so companies seeking the R&D tax credits will need to work hard to ensure they comply with the proposed new definitions and rules.
“The rewards are bigger, but the hurdles are higher, possibly so high that the value may not be there for companies.
“The newfound ability of mining companies to gain access to refundable tax credits before they reach profitability was a big attraction when the May Federal Budget was announced. Now the attraction has waned considerably,” she said.
The Federal Government has also set aside extra funding to increase compliance and audit of R&D tax applications.
“With the refundable credit scheme in operation, the ATO could be writing cheques for millions of dollars – so it will be keeping a close eye on claimants,” Milne said.
“So it is imperative companies currently claiming R&D assess the adverse impact of changes and make sure they are ready from a compliance perspective.”
Milne said that as the changes were only at the consultation stage there is opportunity for input from the mining sector to minimise the impact of the proposed changes.

Background to changes to tax treatment contained in the May 2009 Federal Budget:
• Replacement of the R&D tax deduction with tax credits for all business
• Small business
- Tax credit of 45 per cent (equivalent to 150 per cent deduction, compared to previous 125 per cent deduction)
- R&D tax credits made refundable
- Eligibility threshold increased from a turnover of $5m and a R&D expenditure cap of $1m to a $20m turnover and no R&D expenditure cap.
• Larger business (>$20 million turnover)
- Tax credit (non-refundable) of 40 per cent equates to savings of 10 cents in the dollar for eligible R&D compared to 7.5 cents in the dollar available under the previous scheme.