Denham Sadler
August 5, 2019

Fixing a ‘broken’ R&D tax scheme

Tax

Fixing a ‘broken’ R&D tax scheme

Bill Ferris: The dependence on the RDTI is 'failing us'

As the Morrison government settles in to a new term, industry attention has turned to fixing the “broken” research and development tax incentive to ensure it better supports software and technology companies.

There has been widespread debate over the role and effectiveness of the research and development tax incentive (RDTI) since the federal government flagged significant cost-cutting changes to the scheme in last year’s budget, which are still yet to pass Parliament.

There have also been concerns about the way in which software claims have been treated since the ATO released a taxpayer alert in 2017 saying it was “reviewing arrangements for companies claiming RDTI on software development projects”, and subsequent guidelines last year.

The government also ramped up the number of audits conducted on companies claiming the tax break, with $200 million clawed back last year from double the number of compliance checks.

Debate has now turned to how to fix the important support mechanism, with a push for a refocusing towards more direct funding options, legislative changes to emphasize support for software claims, and a different approach to compliance.

Former Innovation and Science Australia board member and AirTree Ventures co-founder Daniel Petre said the government’s treatment of tech companies claiming the tax incentive has been “appalling”.

“They’re attacking the smaller companies – these are people on bugger all salaries trying to keep control as long as they can and doing cool innovative things, and they’re getting smacked around by the government. That’s just appalling,” Mr Petre told InnovationAus.com.

“Now they’re doing the black letter law, so a bunch of startups are being audited and pulled apart. That’s completely unfair. The government will say they never changed the rules and that’s true, but the way the definition is being interpreted has changed dramatically.

“It’s a mess. The ones they should be going after are the big corporates that aren’t spending much on R&D. That’s where the government can claw the money back, not from small startups.”

It follows comments from former Innovation and Science Australia chair Bill Ferris that the government needs to refocus its support to more direct funding options, rather than the “failing” RDTI.

“The dependence on the RDTI is failing us. The RDTI is working well for the startups and the big inventors like Cochlear,” Mr Ferris told the Australian Financial Review’s Innovation Summit.

‘But there’s a lot of mid-to-large companies claiming for the half of per cent of capex they put into R&D, and that’s doing nothing in terms of the step-changes we need to create new industries and jobs.”

Mr Ferris instead argued that the government should quadruple the funding for direct research programs.

StartupAus chief executive Alex McCauley said indirect funding mechanisms like the RDTI are still crucial for early-stage tech firms.

“That allows companies to use it as a really certain regulatory piece of government support for projects they are planning,” Mr McCauley told InnovationAus.com.

“The grant process sucks up a lot of resources ... even if there is a move to more direct support you can’t ignore the fundamentally critical nature of programs like the RDTI for companies getting on and doing the development of new products and new technologies day to day,” he said.

But the current scheme is “broken” for software companies, Mr McCauley said, and major changes are needed.

“Fundamentally something needs to be done to better support research and development, and particularly software, done by tech companies,” he said.

“At the moment the rug is being pulled out from underneath the sector by a slip in what activities constitute R&D. It’s very clear there is a problem and that’s starting to filter through.”

StartupAus is first lobbying for the government to take a “do no harm” approach to RDTI audits.

“There needs to be a rethink about how we treat historical claims by companies in the software space claiming on the best possible advice and in good faith," Mr McCauley said.

"These are activities they’d been told were eligible, and those companies shouldn’t have millions of dollars at risk. That’s an existential risk and a really big risk for the sector as a whole, and it tends to drive down claims right across the sector,” he said.

There is also a push to change the wording of the RDTI legislation to make it clear the program is meant to be supporting software development.

“The way it is being interpreted in 2019 doesn’t give effect to that. We need to go back and look at the words of the act, and make sure they reflect the intention that software is a big and growing part of R&D,” Mr McCauley said.

“We know the government is still thinking about changes to the RDTI that were announced some time ago.

“At some point in the not too distant future there will likely be legislative amendments tabled for the RDTI, and that’s as good an opportunity as any to introduce some really positive and clear language around supporting software development.”

The federal government is yet to flag how it intends to proceed with its amendments to the RDTI, but has committed to going ahead with the changes included in last year’s budget.

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