Questions to the ATO
ACTING CHAIR: Senator Van, you have the call.
Senator VAN: I have some questions in outcomes 1.1 and 1.2. Can the department provide me with an update on how many applications for the research and development tax incentive were received in 2019-20?
Mr McIntyre: I look after the R&D Tax Incentive program. You were asking about the 2018-19 income year?
Senator VAN: Whichever year is the latest you have.
Mr McIntyre: The 2018-19 income year is the latest one that we have, because of the delay between when tax returns are due and when income years finish. In that year, $11.4 billion of expenditure was registered.
Senator VAN: How many applications were there? First, how many were received?
Mr McIntyre: Eleven thousand, four hundred and sixty-nine applications were received.
Senator VAN: And how many were approved?
Mr McIntyre: I don't have the number of those that were approved. However, the way the process works is that registrations are evaluated and generally approved unless there's very substantial risk associated with their approval. The number of approvals is usually similar to the number received.
Senator VAN: But you said there was $11.4 billion?
Mr McIntyre: Eleven thousand, four hundred and sixty-nine, and I can take on notice the numbers that were approved.
Ms Kelly: And $11.4 billion in registered expenditure.
Senator VAN: Thank you. As I understand it, the department works in partnership with the Australian tax office for the application of the incentive, with the ATO recognising it under the scheme as part of the company's tax lodgement. Is that correct?
Mr McIntyre: Yes. Our department, the department of industry, is responsible for registration and for assessing whether work done by companies meets the definition of R&D in the act, and the tax office is responsible for ensuring that expenditure under those projects meets the appropriate standards to be taken as a tax concession.
Senator VAN: And, if it doesn't meet the ATO's standard, it's then referred back to your department?
Mr McIntyre: In cases where the tax office questions the expenditure, it depends on the reasons why they're questioning it. If they're questioning it because of the documentation around it, that would be a matter that would be dealt with within the ATO. If they're questioning it because it does not appear to fit within the registration of R&D as described in the application, then they can refer the matter to our department to assess whether the registration was valid.
Senator VAN: In the last statistics you have, how many of those were referred back to you?
Mr McIntyre: I don't believe I have referrals on me. I will double-check the statistics I have. I certainly have the number of matters that we have had findings on. Let me find it.
Senator VAN: You can take that one on notice. How many of the approvals were settled and how many remain in dispute?
Mr McIntyre: I can certainly give you the number in the 2018-19 or 2019-20, to date, years. We do a range of different kinds of reviews. In particular, we had 31 findings in the 2019-20 year, 43 internal reviews, 129 advanced and overseas findings, and 203 overall statutory assessments.
Senator VAN: How many of those still remain in dispute?
Mr McIntyre: I'll have to take on notice the number currently on hand.
Senator VAN: If you would. What sorts of general issues are there? If the ATO are referring them back and saying they don't meet your standards, what are the general issues they're raising? Obviously, I don't want you to go into specific cases, but are there some common issues that have come back out of those referrals?
Senator VAN: There's a fairly wide range of issues for which the ATO may refer a matter. Most commonly it's because of questions about whether the work that's been registered as expenditure relates adequately to the application that was made for R&D. It's in cases where a company may be making claims that the ATO feel fall outside the activity that was registered with the department, so they want to clarify that registration. There's been a certain amount of media about companies that have sought to register work that does not fall within the definition of R&D in the act. If there are instances where the ATO believe it may fall outside the definition of R&D as contained in the act, then they'll refer that matter to the department and we will evaluate whether it does.
Senator VAN: If referrals come back to you, how is the department seeking to address them, broadly, with industry or advise them? How do you try to stop these problems coming back?
Mr McIntyre: There's a range of ways in which we're seeking to help companies to register accurately such that they do not become the subject of compliance. Where there's a referral, first of all, we'll deal directly with the company. Some companies get tax advisors and other sorts of advisors to assist them in preparing information to work with the department, but we deal directly with the companies. There's a lot of back and forth in these matters. We ask the company whether there's additional evidence that they can provide to help explain their activities. At times, we have site visits or meetings directly with the companies. When we're at the stage of having draft findings, we provide that to the company for their review and comment before we finalise our decisions. That's the pointy end of things. That's what happens when companies have already made a registration. A lot of the work that we do, and this is increasingly the work that we do, is about helping companies get it right in the first place. We have recently updated what we call our Guide to interpretation, which is a detailed guide to assist companies to understand what is R&D according to the definition in the act and what is not. It would be fair to say that a lot of people have different, if you like, lay views as to what R&D is, but there's a precise definition that we're obliged to apply, and that's contained in the act. That Guide to interpretation has gone through an extensive process of consultation, including with both companies and their advisors. We've received a lot of positive comment about how that can help them get it right in the first place. We run various kinds of sessions for both companies and tax advisors to help them to understand how they can make sure that they register R&D right. Probably the two most common causes of challenge are cases where there are general software projects which are about applying IT development within a company but don't meet the definition of R&D in the act, but are registered. We've clarified our guidance to help reduce that kind of mistake that companies might make. The other area is the keeping of records. It's necessary for a company to be able to demonstrate that they were doing R&D in accordance with their registration and, in the same way that you and I as individuals need to keep records in case the tax office needs us to explain why we are making claims, companies are required to do that. But there are common problems where the company doesn't have the contemporaneous evidence to explain the work done, and in that case we work with them to and see whether there's a way that they can explain what they did.
Senator VAN: I'm pleased to hear that you try to work with them. In some correspondence I get, that's seemingly not what I'm reading. You mentioned the pointy end, where that doesn't happen. I might come to that next, which would be the questions around outcome 1.2. You might need to swap people. I assume the department has an in-house legal team? Is that correct?
Mr McIntyre: Yes, Senator. Indeed, R&D claims are a common source of work for our legal department. There are a number of matters that are with the AAT at any one time related to the R&D tax incentive.
Senator VAN: How many are in that team?
Mr McIntyre: I would have to have our legal—
Ms Kelly: We don't have our corporate people at hand at the moment.
Mr Fredericks: We're seeing if we can get someone. Our chief operating officer is still here. She's just coming from the waiting room.
Senator VAN: I can come back.
ACTING CHAIR: She's joining us now, so it probably makes sense to exhaust your questions now rather than having the disruption of coming in and out.
Senator VAN: Sure. These are quite general questions. I don't think they need too much specialist knowledge. I was just asking how many were in the in-house legal team. A rough number will do, or you can take it on notice.
Ms Richards: I can take the specifics on notice. There are about 50 people in our legal team, but they work across a number of functions, not just providing legal advice. We have our fraud investigation function there and our FOI function. We also provide some support to the anti-dumping program out of that team. Out of the roughly 50 head count, there's a lesser number than that that are legal advisers.
Senator VAN: Do they handle all legal matters, or do you sometimes outsource certain types of work to outside counsel?
Ms Richards: We certainly have a balance between the legal services that we provide within the department and those we outsource to external legal service providers. I could give you a breakdown on our legal service expenditure?
Senator VAN: It's not so much the expenditure that I'm interested in. Is there a panel arrangement? How do you choose the counsel you use?
Ms Richards: Certainly we participate in the whole-of-government legal service procurement arrangements. There is a Commonwealth panel, and we procure legal services through those panel arrangements.
Senator VAN: What sort of categories does the department deal with? By 'categories', I mean things such as industrial relations, contracts, civil litigation, administrative law, grant determinations et cetera.
Ms Richards: We provide a very broad range of legal services within the department. We certainly have an employment legal team. We have commercial lawyers who advise on our procurement and commercial contracting arrangements within the organisation and on compliance with Commonwealth guidelines in relation to grants administration. There are certain legal services that we cannot provide within the department. They might relate to constitutional legal issues, for example. We need to use the Australian Government Solicitor as a tied legal service provider for that kind of advice. We provide some support for litigated matters, with our internal solicitors, but we will engage counsel generally to represent the Commonwealth in proceedings. If the Commonwealth, as represented by the department, is a party to proceedings in a court, we'll also have to engage external legal service providers to represent the department. Our solicitors cannot appear on record.
Senator VAN: So most grant determinations, if they go to the AAT or similar, are dealt with by external counsel?
Ms Richards: We generally engage external counsel to represent the department before the Administrative Appeals Tribunal, yes.
Senator VAN: Obviously I don't want you to go into specific legal cases, but are there some common legal issues that frequently come up in matters that go before judicial or administrative review?
Mr McIntyre: The most common matters related to the RDTI are with the Administrative Appeals Tribunal. There have been a couple of Federal Court matters. The AAT matters do vary, but in the main they relate to a review of the decisions made by Industry Innovation and Science Australia, who are responsible for making the decisions with regard to registration for the RDTI. The way it works is that when a company puts in an application that application is therefore decisioned by the IISA board, but they delegate their decision-making on most matters to the department. We in the department do the assessments, but cases that are complex or that have elements of law that require a decision are elevated to a subcommittee of IISA or ultimately to the board. If a company has a negative finding—in other words, if the decision is that the application does not represent R&D in accordance with the act—the company is entitled to a review. We do internal reviews of those matters. Then, further, if the company is still dissatisfied with the response, the company is entitled to take the matter to the Administrative Appeals Tribunal. That is the reason for most of those cases. The department has a very strong record in having the findings of the department upheld. In cases where the AAT make a decision that varies from the one that was made in the department, the most common reason for that is that the company has been able to provide additional information that clarifies the situation in a way that allows it to be clear that it was R&D, rather than it having been an error of interpretation.
Senator VAN: Could you come back to me with how much time and the costs involved with litigating those disputes. You can take that one on notice.
Mr McIntyre: I think we'll have to take that one on notice, yes.
Senator VAN: Have there have been any occasions where the company has provided that evidence to you beforehand and then it's still upheld by the AAT—that is, you had the evidence, you've still taken it to a tribunal, and the tribunal has found against you?
Mr McIntyre: Without talking to individual cases, generally speaking the approach the department has is that if a company is able to present additional information that clarifies their position we would consider that information. If, as a consequence, our view is that a different decision would be taken then we would seek to work with the company to resolve the matter outside of court. Those things are often described as a settlement, but it is a settlement in the context of a company providing us with additional information that clarifies their position and as a consequence we can then change the outcome of their registration. But I'd have to get to you on notice as to whether there are cases where we have nonetheless taken it to the AAT and then the AAT has found in a way that is at odds with the original decision.
Senator VAN: If you would, because I'm hearing of cases where that's not the case— where you haven't worked with the companies and you haven't helped them go through the evidence and come back to you with the right amount of evidence. It's quite disturbing to me that you'd be wasting taxpayer money in litigating cases that could be resolved in a more cooperative way.
Mr McIntyre: I agree—
Senator VAN: Is the department subject to the government's model litigant rule?
Mr McIntyre: Absolutely. We are subject to the model litigant provisions. We're very much committed to working with businesses but also with the court system. The department's approach to administration is that we want to get the law and its application right. There's not 'winning in the AAT' from our perspective but rather seeking clarity around the way in which decisions are made. There have been a number of cases in the AAT and a more recent case in the Federal Court where that clarity has helped us to make sure that we can administer the law with the most appropriate interpretation. Certainly we have no desire to litigate other than in the service of executing our obligations under law.
Senator VAN: That's not what I'm hearing. Has the department ever been criticised for failing to be a model litigant?
Mr McIntyre: I'm not aware of us being criticised for failing to be a model litigant. Of course there has been some press where companies that have received an outcome that varies from their own view—which of course is inevitably the case where a company has put in an application and the department has found that it's ineligible under the law. Some of those companies have discussed their matters in the press. I note that if there are particular matters—
Senator VAN: I'm not so much interested in what the press has to say on these matters. Can you take on notice how many times this occurred—that you've been criticised for not being a model litigant?
Ms Richards: Under the Legal Services Directions, the department is required to report to the Office of Legal Services Coordination in the Attorney-General's Department on an annual basis in relation to our compliance with the directions generally. But the model litigant obligation is one of those that we report on annually. In the last two years, we haven't had any significant breaches of the Legal Services Directions or model litigant obligations that we've been required to report to that office. In terms of complaints or issues that may have been raised in individual applications, we could take that on notice.
Senator VAN: What do you mean by substantial breaches?
Ms Richards: There was a minor issue of noncompliance with the Legal Services Directions, very technical, that concerned our request for constitutional legal advice. We're required to get that advice from the Australian Government Solicitor, which we always do. We're also required to copy a request for that advice to the Attorney-General's Department. AGS, as you might know, is part of the Attorney-General's Department. There were a number of minor occasions where we omitted to copy the Attorney-General's Department on a request for advice, and that's why I describe them as insignificant or rather technical.
Senator VAN: Can you provide those on notice, the last two years worth? And I hope that we don't see any more of those in the near future.
