RESEARCH AND DEVELOPMENT TAX INCENTIVE
The Research and Development Tax Incentive (RDTI) is the single biggest government program supporting startups in Australia. The program as a whole accounts for around $3 billion in Federal Government expenditure each year, of which about two-thirds is spent on companies with less than $20m in annual turnover. Support for startups under the RDTI dwarfs expenditure on any other startup program. The RDTI is open to any business undertaking eligible research and development (R&D). For most startups developing new products is at the core of the business. 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.
Taking a lead from companies like Atlassian and 99designs, an increasing number of young Australian tech companies are choosing to ‘build local, sell global’ by keeping R&D teams in Australia - even when the business has shifted the other parts of its operations, or even its headquarters, overseas to meet the expectations of customers or investors. The RDTI is a major reason why this model is attractive. Federal political leaders have, for some time, been rightly proud of the program’s ability to support the rapid growth of new, high growth companies creating high value jobs in cutting edge technology fields.
A SMALLER PIECE OF A SHRINKING PIE
All of this amounts to a significant cut to the R&D Tax Incentive. In fact, we know the quantum: 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. Reduced access for startups is likely to result in:
- A reduction in working capital for high growth technology startups
- Lower growth rates for affected companies
- Lower hiring rates for software development firms
- Decreased R&D output as support diminishes
- Failure of some companies, including particularly R&D intensive businesses counting on a reliable source of R&D support
- A reduction in Australia-based R&D by global companies
- A contraction in the number and quality of Australia’s new technology businesses
In the immediate term, there needs to be some reassurance given to vulnerable software companies. Firms with 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. This would help address uncertainty and reduce existential risk for good-faith claimants.
Recent anecdotal evidence suggests the program’s administrators may have begun adopting a less hard-line approach to software audits, giving some companies a warning and advising against future claims rather than moving straight to recoup funds. Such an approach would accomplish some of the aims of a moratorium, although publicly formalising this position would help with certainty and confidence.
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.
To address this, a clear path to supporting technology companies doing genuine software development work in Australia should be formulated. While this goal might be able to be achieved by adjusting the language of the legislation, it is becoming increasingly apparent that a separate program, focused specifically on software and driven by job creation as a primary metric, is needed. Such a scheme would help limit the scope and cost of the support provided, and would support growing tech businesses based on the additive economic value of their development activities.