• Read between the lines of R&D hype

    by  • September 1, 2012 • Stuff I care about • 0 Comments

    My kids were watching one of their favourite shows ‘Good Game’ on an iPad

    …the other day, and my ears pricked up when I heard Megan Brownlow, Executive Director at PriceWaterhouseCoopers giving a warm & fuzzy account of the Government’s R&D tax incentive, and how it can be such a great help to Australia’s gaming Industry. Her words were carefully chosen, as if she knew she was painting a very hypothetical picture. But I couldn’t help thinking that she was also very conscious of the importance of sustaining the growth of this multi million dollar aspect of PWC’s business..

    “I think it (the R&D tax scheme) should lead to us hanging onto our Intellectual Property in Australia…
    Which should lead to more profits being kept in Australia…
    Which should ultimately lead to greater reinvestment and good games…
    and whether or not it does that, will really be up to the developers.”

    Really Megan? …its all up to the developers?  I wish that was the case.

    Recently I had to give evidence via a telephone hookup, to a hearing which took place in the Brisbane office of the Administrative Appeals Tribunal. (to comment on a report I had written for a client in 2008)  although the Government’s Lawyers had done just about everything they could to prevent me from being able to give any evidence at all. That was the most recent of many instances that we experienced of the Government using a range of unfair tactics designed to be prejudicial against exactly the type of small company that they say they are supposed to be assisting.

    “The Government will  do whatever it takes to make sure they do not lose…”

    I have received advice from an R&D Consultant with PriceWaterhouseCoopers (who wanted to remain anonymous), that he had been told, that once the Government has initiated such an audit, they will spend whatever it takes in legal fees and Government resources to make sure that they do not lose such a case, for fear of the possible legal precedents that may arise following a judgment that goes in favour of a claimant Company.

    The case being heard was the final stage in a long drawn out process to appeal against a judgement by Innovation Australia rejecting an R&D claim that had been submitted nine years earlier. Yes that’s right… all take note, the Government, under current laws, can go back and conduct an audit at any time in the future, without restriction.

    The defendant in this case, (because it was an appeal) was The Department of Innovation, Industry, Science and Research which had no less than four AUSIndustry Government Lawyers in attendance, plus their own stenographer, plus a senior Solicitor from high profile law firm Mallesons, plus their own Government appointed Barrister. – The plaintiff was a Managing Director of three relatively small Brisbane based IT companies who was self represented, after having spent more than a hundred thousand of dollars in legal and consulting fees previously defending against what has been a sustained and relentless campaign by the Federal Government, that has been going on since 2006.

    Despite the fact that the company in question had a long history of providing relatively innovative solutions, had won State Government awards, and had an international expert scientific witnesses who could corroborate the novelty of the project, the Governmentʼs official line, that they have been pursuing through Mallesonʼs Lawyers was that: “No Research was undertaken.”  Which to any reasonable person familiar with the company, was plainly ridiculous.

    In one of the cases in question,  the project had been audited by AUS Industry and had received a full compliance report by the AUSIndustry assessor, but when this report was referred to the Board of Innovation Australia, it was rejected, and following established protocols, the ATO were then advised to rescind the claim, but the justifications for this decision were not made public, (officially classified as confidential).

    Following an FOI request to the Department of Innovation, Industry, Science and research in 2009, I received the following information:

    – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

    “AusIndustry does statutory assessments of registered research and development activities, not company audits, which have been identified as high risk or referred by the Commissioner of Taxation. These statutory assessments allow Innovation Australia to determine the eligibility of the activities claimed, and result in certificates being issued by Innovation Australia on the eligibility of activities that are binding on the Commissioner of taxation and are confidential.”

    “No funds are ‘clawed back’ by AusIndustry as a reult of the statutory assessments. The ATO is responsible for ensuring companies comply in the tax system with the outcome of assessments where activities have been deemed ineligible. This information is not readily available to AusIndustry.”

    AUSIndustry undertook 355 risk reviews in 2007-08 and a similar number in the previous four years.

    • 2003-04:   Two projects were either partially or completely disallowed.
    • 2004-05:   Thirty three projects were either partially or completely disallowed.
    • 2005-06:   Seven  projects were either partially or completely disallowed.
    • 2006-07:   Forty Nine projects were either partially or completely disallowed.
    • 2007-08:   Forty Four projects were either partially or completely disallowed.

    – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

    FOI information (and story so far) decoded…

    So AusIndustry does “Statutory Assessments”  that allow Innovation Australia to make judgements, (but such assessments are not binding, because as we already know, Innovation Australia can completely ignore them) but Innovation Australia does produce binding “certificates” to the taxation office, to enforce their decisions, (which can never be released because they are “completely confidential”) but which result in the ATO reversing an R&D taxation offset. Further, the resulting demand for remittance to the ATO for the previously claimed offset amount, (no matter how many years after the fact) should not be deemed to be a “claw-back” by either AusIndustry or Innovation Australia, because… Only the ATO is responsible for ensuring companies comply in the tax system, and anyway, this information is not available to AusIndustry.

    i.e.
    A system designed by Lawyers to create a Government ecosystem of monumental buck-passing, opacity and unaccountability.

     

    Meet Australia’s Innovation Enforcers… The Board of Innovation Australia.

    AUSIndustry, Innovation Australia and the ATO are jointly involved in the provision and assessment of R&D Offset Tax incentives to Australian Industry. R&D claims are based on ʻself assessmentʼ by the various claimant companies, but may be subject to auditstatutory assessment” (at any time in the future) by the ATO or the Innovation Australia Board, typically using AUSIndustry assessors to evaluate eligibility.

    The three organizations mentioned above cooperate when it suits them, while at the same time routinely fall back on opaque and unaccountable practices, based on the proclaimed separation between the organizations, or confidentiality, again when it suits them.

    “Common Mate…  join us, its a  feeding frenzy”

    A Solicitor friend of mine (who I’m sure would like to remain nameless) recounted to me a conversation he had with the head of a specialised R&D consulting practice a few years ago. The conversation was about him potentially joining the R&D practice, and taking advantage of what was described to him as: “…a feeding frenzy”, meaning – ‘easy money, easily available’.

    What is clear is that the R&D ecosystem extends beyond the Government’s Industry support trifecta, and into the realm of Consulting firms like PWC, Earnst & Young and a myriad of smaller players. These companies protect their cosy relationships with Government bureaucrats at industry briefings and play by the Government’s rules. I am not in any way part of that system because I was engaged to help this company because of my background in technology commercialization and innovation research, and I am unlikely to, and don’t anticipate, ever working in the R&D field again.

    However, from my observation, the system as it stands, particularly the risk-review and audit process, seems quite dubious in its efficacy.

    Meanwhile back at the Tribunal…

    The trial at the Administrative Appeals Tribunal went for eight days, Malleson’s withdrew their expert witness at the last moment when faced with the overwhelmingly detailed corroboration provided by my client’s international expert witness, “flabbergasting the Judge” (my client’s words) …and on the last day, just after proceedings finished I chatted to my client on MSN Messenger as we often do, and I was told of an interesting conversation they had with a senior AusIndustry representative immediately after the trial. Here is a transcript:

    • Client: I had a very interesting conversation with the head of AusIndustry,  after the judge was gone from the room.
    • Client: i asked .. what is the department going to do to help small business .. what tools are you going to provide to companies like us .. that have a genuine attempt of R&D , that are trying to be innovative and trying to improve systems, processes …
    • Client: He said it was his personal view that small business should be exempt from this level of scrutiny …and that it should be reversed in that the department should (have to) prove that the R&D was not conducted…
    • Client: and they are saying for claims like mine . .where they are small … in fact they are saying anything under 1 million falls into a micro claim .. they should not prosecute unless it is clearly a fraud.
    • Client: But… unfortunately the law does not reflect his personal views .. and that the law is the law ..
    • Client: he did note .. the size and cost to prosecute these claims is enormous ..

    In conclusion

    Although it is fair to say that this particular client had kept very poor records, and this certainly had not helped their case, it was not evident that they deserved such harsh treatment.

    POSTSCRIPT:  (a few years later)

    I spent a lot of time assisting this client, much of it pro bono. However, it must be said that you ‘reap what you sew’… When working with agencies like AUSIndustry and R&D tax schemes it is not wise to ‘bite the hand that feeds’ and thumb your nose at public servants who’s job it is to ensure compliance with the rules of the systems you have signed up to benefit from. (and it now seems that important lessons were not learned)

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