December 5th, 2019
StartupAUS, Australia’s national startup advocacy group has today released its latest reports including a series of recommendations to enhance the local eco-system for fast-growing companies.
Included among the recommendations are calls to allow the R&D Tax Incentive to be more easily applied to companies conducting software development activities.
Some key quotes from the report are as follows:
- “Since its introduction in 2011 the RDTI has been a key reason for startups to employ Australians to undertake R&D, and a major driver for companies to keep R&D efforts based in Australia even when the business expands overseas;
- The R&D Tax Incentive is set up in such a way that, despite its importance to startups, it has always been awkward for software firms to meet the requirements. Under the scheme, eligible R&D must follow a strict and extensively-documented scientific model (called the ‘Frascati model’) of hypothesis, experimentation, observation and evaluation, and logical conclusions.
- Nevertheless, the current iteration of the RDTI was designed explicitly to include most software development as eligible R&D. When introducing the current legislation in 2010, the Minister said:
“Recognising the pervasive nature of information technology in a modern economy, the new R&D Tax Incentive will ensure most software R&D is treated consistently with R&D occurring in other sectors”
- In line with this advice, claims made by software companies were paid consistently for many years. The OECD updated the Frascati Manual in 2015 to explicitly acknowledge the validity of software development as a form of R&D;
- The R&D Tax Incentive has been the focus of some concern over the last few years. The cost of the scheme has been rising, leaving policy makers worried that it could spiral out of control;
- In the meantime, concerns about the cost of the scheme continued, and the program came under pressure. In February 2017 the ATO and AusIndustry issued a Taxpayer Alert seeking to clarify the position on the eligibility of software claims under the RDTI;
- Perhaps most significantly at a system level, companies have begun to see R&D claims as risky, and started to self-censor. A common experience right across the sector is that R&D claims for genuine software development are being pared back substantially to try to reduce the risk of facing a potentially catastrophic clawback;
- This comes at a time when Australia’s total spend on R&D is already well below the OECD average at around 1.87% of GDP (OECD average around 2.3%) and is falling. Australian businesses spent $16.7 billion on R&D in 2015–16 compared to $18.9 billion in 2013–14, a decrease of 12%;
- There is a serious risk that a depleted RDTI could begin to cripple Australia’s burgeoning startup sector at a critical time. The program has become a vital piece of infrastructure in the startup landscape;
- In the immediate term, there needs to be some reassurance given to vulnerable software companies. Firms with a turnover of less than $20m that have been claiming the incentive in good faith and on credible professional advice need to be confident that they are not going to be subject to audit processes unless their claims are manifestly unreasonable or have had sharp unfounded increases. A moratorium on reviews within these parameters should remain in place until the introduction of a clear legislative fix to the way the R&D Tax Incentive operates or a new scheme that directly supports software development is implemented;
- Recent anecdotal evidence suggests the program’s administrators may have begun adopting a less hard-line approach to software audits;
- Reducing clawbacks helps reduce the immediate harm caused by software falling out of the RDTI, but it doesn’t solve the larger problem: the outflow of support and capital from an area of activity vital for Australia’s long term economic prosperity”
A full copy of the report is available on the StartupAUS website.
Swanson Reed commends the work of StartupAUS in advocating for Startups and software claimants. We also support the efforts of the ATO and AusIndustry to uphold the integrity of the R&D Tax Incentive, and encourage all participants of the programme to review the R&D Tax Incentive guidance material published by these agencies.