Denham Sadler
December 6, 2018

R&D changes now ‘life or death’

Crossroads

R&D changes now ‘life or death’

Taxing times: The R&D tax incentive is critical for the health of software development sector

The federal government’s planned changes to the research and development tax incentive present a “critical risk” to Australian startups, and could lead to the collapse of many companies or the sector as a whole.

In this year’s StartupAus Crossroads report, recommendations for ambitious improvements to the research and development tax incentive (RDTI) – the focus of previous years – have been replaced with a call to just keep the scheme alive for startups.

The alarm, and the change of tack, follows changes to the scheme announced in this year’s budget, and a crackdown on software-based claims.

“We’ve moved away from those recommendations because the political climate around the RDTI means there’s more pressing issues – that of keeping it alive for software companies,” StartupAus chief executive Alex McCauley said.

“It has been the backbone of government support for startups over the last seven years since it was introduced, and to have this slip away would present a critical risk to a sector that’s on the point of really maturing and generating lots of value for the economy,” he said.

There is a need for urgency around these changes, with Mr McCauley saying that a number of Australian businesses are already feeling the impact of a crackdown on RDTI claims.

“This is life or death for some businesses, and it could be life or death for the sector. The ramifications are spreading to companies across the sector and driving down the value of the RDTI for the sector,” he said.

“It could really undermine the most important bit of government support for the sector, and slow down the growth of the sector dramatically,” he said.

StartupAus is now calling for clearer definitions surrounding software claims under the RDTI in the short-term, and a new program to support software research and development in the long-term if the government’s controversial changes go ahead.

“We need to change the legislation to reflect the importance of software R&D so that interpretation gets taken out of the game. We need really clear identification of software R&D in terms of the nation’s R&D support,” Mr McCauley said.

“That has to go into the legislation of the changing interpretation to not be an issue in the near-term.”

StartupAus has proposed that software companies with annual turnover of less than $20 million be exempt from RDTI audits as long as their claims are similar to others, no more than 50 per cent larger than the previous year and developed by a specialist R&D advisor.

“There’s a need for software companies to have some confidence that they’re not going to be targeted by the audit process so long as they’re submitting reasonable claims based on best advice and acting in good faith,” Mr McCauley said.

While the RDTI is the key priority in terms of political recommendations in the 2018 Crossroads report, there are also a number of “tweaks” to existing support programs and “big, bold initiatives”.

The tweaks recommended include changes to the Export Market Development Grant scheme to introduce a stream specifically for startups, the expansion of copyright safe harbours for tech firms, and improvements to the employee share scheme.

Among the bigger initiatives recommended by StartupAus are for a government-funded “large-scale data collection” project with a coordinated, standardised approach in order to overcome a lack of reliable and comprehensive data on the sector, illustrated by a number of contradictory reports and surveys released recently.

“At the moment there isn’t a coordinated strategy for how we collect and report data across the sector, and support for data collection assets is extremely limited from a government perspective, and it’s pretty piecemeal,” Mr McCauley said.

“If that was a bit more centrally coordinated and strategic it would be helpful for anyone trying to assess the growth of the sector and where it needs more work.”

The project could involve the government funding an existing data collection organisation and providing a strategic framework to paint the overall data picture, the report said.

“There’s a case to be made that the government should be supporting high-quality data collection efforts across the country, and should be helping to decide where those efforts are focused,” he said.

“It would obviously be super helpful to be able to identify the impact the sector is having on the economy to clearly identify how many people are working in startups and what percentage of the GDP is attributable to the growth of young tech companies.

“All that stuff is easier to model if you’ve got better data, and it’s really useful from a government perspective too.”

Other bold initiatives recommended by StartupAus include the establishment of an “innovation ambassador” tasked with attracting “cutting-edge R&D projects from global tech firms” and the launch of a national entrepreneurship academy.

“These are headline policies where the idea is to try to capture some political imagination and play to some ambition from our national leaders around how Australia can generate genuine world-beating talent here and really put ourselves on the global map when it comes to technology,” Mr McCauley said.

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