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Is Aus R&D Incentive holding back ICT startups?

A recent report by the Australian Information Industry Association (AIIA) has warned of the risks regarding innovation in the Australian ICT sector if the government fails to foster growth in more technology startups.

In the AIIA’s “SmartICT 2014: A vision for sustained national prosperity” report released 4 March 2014, the AIIA highlighted Australia’s tax rules, particularly in relation to the R&D Tax Incentive, as being a major problem holding back the nation’s ICT industry.

The AIIA report stated “Requirements in the R&D tax incentive legislation that disallow ICT related to R&D in specific circumstances reinforces industry concern that the role of ICT in driving innovation and growth and ultimately the economy are poorly understood”.

The AAIA statement refers specifically to section 355-25 of the Income Tax Assessment Act (ITAA) 1997 which states that “developing, modifying or customising computer software for the dominant purpose of use by any of the following entities for their internal administration (including the internal administration of their business functions)” is excluded as qualifying as a core R&D activity. The entities excluded include the developer for which the software is developed, modified or customised; an entity connected with the developer; an affiliate of the developer or an entity of which the developer is an affiliate.

Concerns with this legislation is that it can be read to imply that any ICT R&D undertaken by a company for internal use is ineligible for the R&D tax incentive.

The AIIA report also protested a decision by the Coalition not to move forward with a tax reform which would allow R&D tax credits to be administered quarterly, providing more access to cash to the scheme.

Swanson Reed previously wrote a submission in support of the quarterly tax credits stating that “The ability for companies to obtain a recoupment of their R&D expenditure in the short term (rather than having to, potentially, wait for 12–20 months, if claiming the R&D Tax Incentive within their annual returns) may again make the prospect of undertaking R&D activities more attractive to small companies”.

The AIIA report concluded that “growing our ICT capability through improved R&D capability and capacity and forging better links between research and industry” was a key area for action for the Australian government.

The report also made recommendations to government that “in the context of the 2014 review of the R&D Tax Incentive, disincentives and barriers to ICT R&D in existing R&D legislation and policy are addressed”. The aim of these recommendations is to encourage development of R&D focused on digitisation of services.

Click here to access the AIIA report.