A government-led Senate inquiry has called for changes to the research and development tax incentive, including more clarity on the eligibility of software claims and the introduction of restrictions on damaging clawbacks.
The Select Committee on Financial Technology and Regulatory Technology, chaired by Liberal Senator Andrew Bragg, tabled an interim report late on Wednesday. The report, comprising nearly 300 pages and more than 30 recommendations, covers tax, regulation, capital and funding, skills and talent and culture.
The research and development tax incentive (RDTI) was a key issue raised by several submitters and witnesses to the inquiry, with concerns about the “long and difficult” application process, uncertainty about making software development claims and the prospects of retrospective audits resulting in claims being clawed back sometimes several years after they were paid.
“The committee was told that as a result of the complexity and uncertainty of eligibility and audits, claims are being pared back or not lodged at all to reduce the risk for startups. The committee understands that companies, especially startups, need as much certainty as possible and facing repayment of scarce capital would be particularly difficult for a small company,” the committee said in the report.
It recommended that government better clarify the eligibility of software claims under the scheme.
“The committee believes there needs to be greater clarity around the point at which software is seen as innovation and the point at which it is not. The committee considers this additional clarification is required to clarify when and how the RDTI is applied to software development in relation to FinTech businesses to ensure genuine software creation by Australian startups is reliably supported,” it said.
The Senators also called on the government to provide clearer guidance on RDTI audits and to place limitations on the ability for the payments to be clawed back retrospectively.
These recommendations were welcomed by FinTech Australia chief executive Rebecca Schot-Guppy, but more needed to be done to fix the RDTI.
“This policy area is consistently flagged by our members as the key piece of legislation underpinning the growth of the FinTech industry. We’re pleased at the number of constructive suggestions made here,” Ms Schot-Guppy said.
“As this policy is crucial to the ecosystem, we still believe there is more that can be done to enhance it. Some other measures include an increased rebate and the introduction of a collaboration premium. Also, a separate more flexible payment regime for startups and FinTechs such as quarterly payment.”
Legislation currently before Parliament would make a series of significant reforms to the RDTI, amounting to a $1.8 billion cut to the scheme.
While the legislation is still yet to be passed, the government is still planning to apply the changes retrospectively to the 2019-20 financial year, meaning potentially thousands of companies will face having their RDTI claims clawed back, the exact concern that the government-led committee has raised.
Another Senate committee is currently scrutinising the RDTI legislation but is now not expected to report back until after the October budget.
The Senate report covered a wide range of issues and policies, including the Consumer Data Right, digital identity, the regulation of buy now, pay later services and investor incentives.
It recommended that a new national body be formed to “consolidate regulatory responsibilities in relation to the implementation of the CDR”, and the launch of targeted education campaigns on the scheme.
The committee recommended the early-stage innovation company and Early Stage Venture Capital Limited Partnerships qualification criteria be widened, and that the government’s digital identity work be accelerated “in order to deliver a national, economy-wide framework for the operation of a federated digital identity ecosystem as soon as possible”.
The interim report is based on a number of “quick wins”, with more structural issues to be addressed in the committee’s final report in April next year, Senator Bragg said.
“If we are going to compete with Singapore and Tokyo, we first need to get our house in order at home. Much progress has been made but it’s time for some recalibration. Government should not be afraid to act like in FinTech and be iterative,” he said.
The two Labor senators in the committee issued a dissenting report, backing most of the recommendations but calling for an accompanying modernisation of consumer protections.