An $85 million federal government commitment from the 2018 budget to improve the compliance of the Research and Development Tax Incentive only led to 5 per cent of the target revenue being collected, an audit office has found.
The Australian National Audit Office (ANAO) tabled its report on the administration of the R&D Tax Incentive (RDTI) on Thursday afternoon. Despite the collaction shortfall. the AANAO found the Industry Innovation and Science Australia (IISA), the Industry department and Australian Taxation Office’s (ATO) administration of the scheme was “largely effective”, along with their communication efforts around it.
But the watchdog also said that RDTI reviews and assessments by the agencies were taking up to three times longer than their targets, with only a fifth of assessments being completed within the targeted time.
The RDTI is the Commonwealth’s key support mechanism for industry, providing a tax offset for research and development, with an aim of incentivising activity that would not have been conducted otherwise.
More than 12,000 companies registered for the scheme in 2019-20, with $4.5 billion in tax offsets provided in the same year.
Companies self-assess their eligibility for the RDTI, with the agencies then conducting compliance around this either before or after a claim is processed.
A series of significant changes to the scheme were passed by Parliament last year and came into effect from the start of this financial year.
The ANAO launched its audit of the administration of the RDTI, which is split between IISA, Industry and the ATO, earlier this year and tabled the final report on Thursday.
It found that the overall administration of the scheme, the communication and registration of activities, the communication and claims processing and performance frameworks in place were “largely effective”.
The audit office made three recommendations to the agencies, centred on improving processes around advance findings and examinations, and the ATO’s monitoring and reporting of compliance activities.
In the 2018 budget the government gave just under $70 million to the Industry department and $16 million to the ATO for additional compliance and integrity measures for the RDTI. This funding was not for specific changes, but the ATO said it was mostly for additional compliance and integrity activities.
But the ANAO found there “had not been a coordinated approach” to the delivery of this budget measure, and that the tax office “had not met its commitment to government”.
“The agencies did not have a coordinated approach to the delivery of a 2018 budget measure that included increased funding to implement stronger compliance and the ATO had not used this funding in accordance with its commitments to government. There was also a lack of monitoring and reporting on joint compliance,” the audit said.
From 2018-19 to 2020-21, the ATO did not meet its planned targets associated with the additional funding. In the last financial year, the ATO had a target of raising liabilities of $100 million, but only raised $2.94 million. It had a target of additional revenue of $60 million, but only collected $3.21 million – just over 5 per cent of the aim.
In the second quarter of 2020-21, the ANAO found that the ATO reallocated all planned RDTI work from business as usual funding to the budget funding, with all of its compliance activities to be linked with that funding. This was the ATO “essentially acknowledging that it would not be able to meet the commitment to government for additional compliance activities”, the audit found.
The ATO developed a strategy report for its compliance arrangements in 2018-19, but this was not implemented due to the bushfires in 2020 and the COVID-19 pandemic. This meant that from June 2019 to June 2021 there was no specific compliance strategy, despite the ATO having received extra funding in the 2018 budget for this covering this time.
In July 2021, the ATO finalised its strategy, but is still in the process of developing a plan for its implementation and monitoring, the ANAO found.
The audit also found significant issues around the length of time IISA and Industry are taking to conduct advance and overseas findings assessments.
Under the RDTI, companies can voluntarily undertake an advance finding to ensure their eligibility for the scheme before claiming, and can also lodge an overseas findings for R&D work conducted outside of Australia.
The agencies had a target of completing these reviews within 90 days, but failed to meet this goal, with many taking longer than a year to be finalised.
The average time taken for advance finding assessments was 224 days, the audit found, with only 20 per cent completed in the target of within 90 days. Seven assessments took the agencies more than a year to complete.
In terms of overseas findings, the average time to complete an assessment was 195 days, while the longest took more than two years.
“The lengthy time periods and investment involved in applying for and receiving an advance finding may be a barrier for R&D entities in applying for a finding. The length of time to receive overseas findings may also be problematic for R&D entities as they have to receive the finding before registering for the program,” the ANAO said.
The ATO is responsible for conducting assessments of the eligibility of companies accessing the scheme. These also should be completed within 90 days, but the audit office found that on average these are taking 200 days, while 49 out of 457 took more than a year.
The ANAO recommended that in terms of advance findings, the agencies undertake analysis to better understand why companies do and do not apply for these assessments, develop a strategy to encourage more companies to do so and set public service standards relating to the timeliness of these claims.
The Industry department and IISA should also improve examination processes in order to give entities greater certainty and reduce the potential for further duplicative compliance action, the ANAO said.
The agencies agreed to both of these recommendations.
For the ATO, the ANAO said it should establish monitoring and reporting arrangements to assess the effectiveness of its compliance approach for the RDTI. The tax office also agreed to this recommendation.
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