An entirely new, standalone R&D scheme for software companies would be more effective than further tinkering with the existing tax incentive program, according to StartupAUS chief executive Alex McCauley.
Addressing a public hearing for the Select Committee on Financial Technology, Mr McCauley said the current research and development tax incentive (RDTI) still isn’t working for tech companies looking to make software claims.
“It’s always been a bit of a square peg in a round hole for software firms to claim the RDTI under the current iteration of the scheme because it’s very focused on research,” Mr McCauley told a recent committee hearing.
“The methodology for claiming RDTI is around development of a hypothesis and then experimental testing. It doesn’t really fit with this kind of agile software development process that most companies use for developing software, so that’s always been a little bit difficult,” he said.
“We’ve seen evidence that it’s been harder and harder for software companies to claim the RDTI in the last few years.”
He said that as many as half the software claims under the RDTI that had been audited were eventually rejected.
“This has been the cause of significant concern both for companies, who now feel that this backbone support policy – it’s the single biggest policy for any government in this country to support software R&D – is slipping away from them as it’s harder for them to claim software R&D under this program,” Mr McCauley said.
Investors are also now viewing RDTI claims as a potential liability for tech firms, with these firms able to be forced to repay claims up to seven years after making them.
“We’ve seen that this could run to millions of dollars for some of these companies, which can’t afford to have millions of dollars of debt suddenly spring up. These companies are not yet profitable and are still being backed by venture funding and are still trying to get off the ground,” Mr McCauley said.
The two main options put forward to fix these issues are to more clearly define the support for software under the RDTI through changes to the language in the legislation, or to launch an entirely new scheme focused just at early-stage companies doing software as their core business.
Mr McCauley said the latter is the better option, and Liberal Senator and committee chair Andrew Bragg said “that’s a model that this committee would consider”.
“The advantage there is that we all know that software is becoming more and more a core part of most businesses, whether it’s a bank, a mining company or a tech company, so it is hard to see how you would limit the growth of the R&D tax incentive vis-a-vis software if it were in its current incarnation,” he said.
“A standalone program targeting companies whose core business is the development of software would probably be a more effective way to do it.”
There has been growing support for the creation of a standalone program to support software R&D, with Atlassian and WiseTech also telling the committee that a separate scheme may be required.
Also addressing the FinTech inquiry, Afterpay co-founder and co-chief executive Anthony Eisen said that Australia has a “once-in-a-lifetime” and “once-in-a-generation” opportunity to be a world-leader in FinTech.
“The current global environment and Australia’s success in dealing with the COVID-19 pandemic can be a catalyst to drive our competitiveness in these industries of the future,” Mr Eisen told the committee.
“We firmly believe we have the talent and skills, the location and lifestyle and the economy and infrastructure to be among the best in the world,” he said.
“At a time when Australia has never been a more attractive place to live and grow your career, I firmly believe that, with the right approach, we can secure our spot on the global stage – but the competition is fierce.
“There is substantial opportunity to increase take-up of highly skilled visas, to fast-track processing and to enhance awareness. This can be supported by globally competitive incentives and tax settings for startups and their employees.”
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We have been working with the RDTI since its inception for all industry types including software. During that time we have not had a claim rejected or reversed. The issue with software claims is not creating special legislation, its the accountants or consultants preparing the claims. Do we need to create special rules for every industry?
Airtasker were asked to repay millions despite working on eligible R&D projects. Why? The consultant did not provide the right information. Digivizer had to make a repayment for the same reason. The withdrawal of the large CBA RDTI software claim also related to the consultant.
The government has not kept the rules and requirements of the RDTI a secret. They have been very open in what they accept as an eligible project and the information required to support it. If claims are lodged with full compliance of these, the claim will be approved. It’s not rocket science (which ironically would be an eligible RDTI claim).
Our advice. Don’t use a GP for brain surgery. Don’t use an accountant or consultants for RDTI claims. Use an experienced Grants Specialists. A business that specialises in preparing grant applications, and not just RDTI and EMDG claims but all 1000+ grants. Your fully compliant RDTI claim and a range of other grants will support the success of your business rather than being required to repay the ATO which could destroy your business.
The RDTI program is designed to assist businesses in any sector to claim the financial risk associated with technical or scientific risk i.e. undertaking experimental activities. The software claims that you refer to being rejected were based on business risk not technical risk as they were using known technologies to deliver a different type of business model which is not R&D and should not be supported as its business as usual – i don’t think taxpayers money should be directed at funding these types of businesses as they are not actually creating any true IP. The RDTI or any Government program should not be seen as a vehicle for funding a new business venture – this is called raising capital. I believe this very distinction is not spoken about – just have a look at the 3 recent AAT cases where software claims were rejected – all were seen as business as usual developments using existing technologies – the distinction if software development vs software research and development – if the expert in the field doing the R&D is a computer scientist they understand the scientific method and are often doing eligible R&D but if the developer is a software engineer often referred to a software builder ( these days) they are working with existing information/ technologies to deliver a business model which is merely development work as the know they can do it – nothing risky other than is the business will succeed or fail, there seems to be a notion these days that tech start ups all deserve a leg up as its the latest craze, if these companies were funded so should every other new business getting started in any sector which will never happen.
I reckon that within the Agriculture Sector 25% of practioner families and small/medium scale companies have been serious equipment manufacturers or adapters for generations.