R&D Tax Incentive backtrack welcomed, but software uncertainty remains

Last night’s budget announcement saw the government backtrack on some of the most contentious aspects of its R&D Tax Incentive amendments, putting an end to months of uncertainty, and suggesting the government has actually listened to the cries of the tech sector.

But, while it’s a win for most, the budget papers didn’t offer any clarity on eligibility for software startups.

So, does the measure go far enough?

Previously, the R&D Tax Incentive was facing an amendment that would have cut $1.8 billion from the scheme. It would also have implemented a $4 million cap on refunds, and brought in a tiered eligibility system.

Last night, Treasurer Josh Frydenberg gave the scheme a $2 billion boost instead, while also removing the contentious cap, and simplifying the tiered system, so it will only apply to larger companies.

The measure comes as a welcome relief to a tech sector that has been vocal in its demands here.

Back in August, StartupAus chief executive Alex McCauley was a signatory on an open letter to the Prime Minister from leaders in the tech sector.

In that letter, one of the biggest demands was a pause on cuts to the R&D Tax Incentive, McCauley tells SmartCompany.

“They’ve actually more than done that,” he says.

“They’ve rolled back most of those cuts and added some $200 million to the value of the RDTI.”

McCauley sees the move as “a really, really good sign” that the government is considering R&D as a way to drive growth, he says.

“It’s exactly the right sort of thinking,” he adds.

“In lots of ways, I’m really gratified that the government has listened to the sector and heard the concerns.”

While McCauley had been hopeful the government would at least postpone the changes, the measures go further than he expected.

Where the claimable rebate was set for 13.5 percentage points above a business’ taxable rate, now that’s jumped to 18.5 percentage points, uncapped.

“I don’t think anyone was expecting for the RDTI to get more valuable,” he says.

“That’s a really big win.”

The software saga continues

There is, however, still one unknown in the RDTI saga. There has been much confusion about whether software R&D activities are included in the scheme, and we’ve seen the ATO making clawbacks of money it says was wrongly claimed.

This was not addressed in last night’s budget.

Mandeep Sodhi, co-founder of AI startup Effi, noted that software development will drive the “next phase of growth” in Australia.

“AI will be the key for driving productivity of Australians, and companies like Effi will be investing heavily in R&D to develop right AI solutions and compete at a global level — but this is only possible if companies like Effi can access R&D incentives easily,” he said.

Indeed, McCauley acknowledges there is work to do now. But, where we were facing multiple levels of uncertainty, now there’s only this one piece to pore over.

“Clearly a lot of the uncertainty has gone,” McCauley says.

“There was a big package of measures that were sitting in the Senate for almost two years, that was hanging over the program … all of that has gone away.”

Now, StartupAus is able to focus on this next step — figuring out exactly what kind of software R&D qualifies, and what doesn’t.

“That’s a piece of work we will be pushing very strongly over the next seven months,” he says.

After all, budget 2021 is just around the corner.

“We’ve got a narrow window to build on some of those measures in this budget,” McCauley explains.

And he’s hopeful last night’s announcement represents a changing of the tide.

He sees the backtrack as “a directional move from the government to double down on R&D”.

Now it’s time to bring the focus to software startups, to make sure they get “the same treatment as everyone else”.

Easing the pressure

Of course, the context of this year’s budget has changed significantly. Rather than a government striving for a surplus, we have one responding to an economic crisis, and flying towards a deficit of almost $1 trillion.

That push for a surplus meant there was pressure on each and every tax initiative.

Now, we have “a little bit more headroom”, he says.

“The change in direction for the program will help alleviate some uncertainty that was coming from a budget pressure on the system,” McCauley explains.

“There was a sense that definitions needed to be tightened and costs needed to be squeezed out of the program wherever possible … to try and meet those budget expectations,” McCauley suggests.

“Now, clearly it’s back to being a full-funded program in the government’s economic agenda.”

In fact, he also says he’s noticed an easing of how audits of software companies are being treated. Even over the past six to eight months, those processes have become a bit fairer, he notes.

“All of that together will give companies a lot more confidence that they can make fair claims for software under the RDTI, and now get a bigger rate of return.”

About time

Finally, where previously we were looking at backdated cuts and ATO clawbacks, now all changes are set to be implemented in July 2021.

Although, of course, if the new changes were to be backdated they could have potentially put money in the pockets of startups sooner.

FinTech Australia chief Rebecca Schot-Guppy called the reversal of the RDTI changes “perhaps the biggest surprise” of the budget.

“The increased R&D spend will ensure that new innovative businesses come into our economy which will help lead our recovery,” she added.

But, her “only concern” here was the delay in implementation.

“For us to have the best chance of supporting the sector through this pandemic, it needs to be introduced now,” she said.

Elsewhere, David Rennex, co-founder of AI debt recovery platform DebtForce takes the opposite view.

“The timing of these changes is also pertinent, with the changes to take effect from July 2021, a time where the true economic impact of COVID-19 will be known,” he said.

For McCauley, this is splitting hairs.

“It’s hard to look at $2 billion injected into a core program for tech and complain,” he says.

First of all, most businesses would have already made their RDTI claims for this year anyway, he says. It’s an annual thing, not a quarterly one, he notes.

And, there are other programs designed to offer immediate support for all businesses, not just startups.

“For me, this really is probably the biggest thing the government could possibly have done to support tech companies,” McCauley says.

“It’s been our number one, two and three priority item for a couple of years now,” he adds.

“It’s a really big win for the sector, and frankly, for the economy as well.”

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