James Riley
April 5, 2017

R&D tax is an uncertain mess

StartupLand

R&D tax is an uncertain mess

Arthur Sinodinos: Has been left holding the baby on the R&D Tax Incentive confusion

A weird silence has descended on discussions about the future of the R&D Tax Incentive. Uncertainty about how the scheme will be applied to software is already having an impact across the system, particularly among tech-enabled startups.

It’s weird because the R&D Tax Incentive is the central pillar of the Commonwealth’s research and innovation strategies and has enjoyed largely bipartisan support.

But right now it is the cause of much anxiety among smaller innovators.

Either the government is about to launch a spectacular new replacement scheme, or the R&D Tax Incentive has evolved into a quietly unfolding disaster.

If uncertainty is the enemy of business investment and growth, then the R&D Tax Incentive is looking a lot less friendly these days.

This week marks the one-year anniversary since the head of Innovation and Science Australia Bill Ferris, the Chief Scientist Alan Finkel, and the Treasury Secretary John Fraser handed their review of the R&D Tax Scheme to the then Industry Minister Chris Pyne.

Colloquially known as the Three F’s review – named for its three very senior, extraordinarily well credentialed authors – it contained six recommendations, some welcomed by the tech industry and others not so welcome.

The point is that a year has passed and the government has still not formally responded to these recommendations. And it’s not in any hurry either.

The now-Industry Minister Arthur Sinodinos won’t take questions on the issue. Industry groups have found it increasingly difficult to get advisers on the phone. It has simply gone quiet.

There are a bunch of theories about the reasons for the delay, all of which are moot. It is the speculation itself that is driving the uncertainty.

People aren’t concerned about some unseen hand of the wheel, taking us all in a weird direction. It’s more a concern that there’s NO HANDS on the wheel and that we all might arrive at a troubling and harmful destination sooner than we want.

When InnovationAus.com sought clarification from Senator Sinodinos’ office about when the government would respond to the review of the R&D Tax Incentive scheme, together with a list of queries about controversial Tax Alerts that sent tech and software innovators into a spin of uncertainty, we got a one sentence reply.

Attributable to a spokesperson: “The Government is considering the recommendations made in the R&DTI review and will provide a response once those deliberations are complete.”

Well thanks for that. And the uncertainty rolls on.

Anecdotally, there are signs that the uncertainty is leading some startups and scale-ups to put off claims to the scheme, or to under claim. There are companies saying that they can’t risk applying to the scheme; if the self-assessment goes awry, if there is an adverse audit down the track, they could be wiped out they say.

But mainly, the uncertainty is a distraction. The time spent worrying about whether they still fit the parameters of the scheme is time that should have been spent on the focused development of their product, or service or business roll-out.

The R&D Tax Incentive is the largest single government investment in the tech and innovation sectors in this country, accounting for about one-third of the $9 billion to $10 billion we invest in R&D in this country.

It is this one-third that is most heavily focused on the commercial side of research and development – and on the so-called translational issues that Australia is trying to get better at. And yet it is this end of R&D that seems to be getting the squeeze.

On the Tax Alerts that sent the industry into a spin, there are mixed messages coming from government. A face-value reading of the Tax Alerts from the ATO suggests that it is taking a very different interpretation of the scheme, particularly in relation to software and process automation.

And yet through backchannels, the government is saying nothing has changed, and that businesses should keep claiming.

The fact that these Tax Alerts were issued at a time when the government has been sitting on its own review for a full year, there is every reason to be nervous.

There may be good reason for the tardiness. Maybe it’s simply an ongoing problem related to corporate memory loss: Every time an industry minister gets shuffled on to another portfolio, the new guy and his staff have to get across the details.

The report was handed to Minister Pyne, who hand-balled it to Minister Greg Hunt (promising to have a response in the New Year), who passed it to Minister Sinodinos, who is now left holding the baby.

Maybe government is seeking more data: Perhaps it is pouring over R&D Tax Incentive applications in the weeks following the Tax Alert – to see if there has been a change in behaviour (and therefore reducing the cost of the scheme. Or perhaps it’s looking more closely at audits – to flesh out the inappropriate claims.

These things might have a budget impact. Maybe government is waiting to better understand that – so that it can book some savings into the forward estimates. Or maybe it is planning something big and bold, completely new.

Whatever is going on, the point is that the industry is not being told.

Vacuums create uncertainty. And uncertainty is the enemy of investment and business growth.

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