The “strict interpretation” of what constitutes an eligible activity under the Research and Development Tax Incentive restricting software claims is “ludicrous” and leading local tech companies to move offshore, a Senate inquiry has been told.
The Select Committee on Financial Technology and Regulatory Technology held a series of public hearings in Canberra last week, with the R&D tax incentive (RDTI), proving a significant focus.
The current definitions in the scheme, and how they are being determined by Innovation and Science Australia, is damaging software companies, FinTech Australia former chair and MoneyPlace co-founder Stuart Stoyan told the committee.
“The challenge with the RDTI for FinTechs and startups is that the definitions were defined prior to technology companies really being in play. What you then have is Innovation and Science Australia applying a strict interpretation to those definitions,” Mr Stoyan said.
“There is now a delineation between R&D innovation and non-R&D innovation, and non-R&D innovation is software. The assertion that innovation cannot happen outside of a petri dish is ludicrous.
“You see a bias and a very strong opinion from ISA that unless it’s following a scientific method, unless it’s in a lab, then it’s not innovation. But it’s possible to follow a scientific method through a software environment.”
Software claims under the RDTI have become increasingly contentious, with a number of tech firms subject to clawbacks and currently challenging the decisions of Innovation and Science Australia.
“It’s a very difficult struggle, and there are a number of FinTechs caught up in disputes with ISA. There’s an inconsistency in approach from ISA as to how software is being treated. There’s confusion around at what point software innovation is innovation,” Mr Stoyan said.
“The key point here is that a number of FinTechs and startups generally are wary of this because they’re concerned about clawbacks and having to expend limited resources as opposed to going through an administrative, bureaucratic process and getting wrapped in red tape.”
Mr Stoyan pointed to recent comments made by ISA chair Andrew Stevens that tech giant Atlassian would not be eligible for the RDTI under the current definitions.
“One of Australia’s most innovative companies on a global stage is not doing work that constitutes true R&D? That ultimately leads to companies moving offshore,” he said.
FinTech Australia board director and Paypa Plane founder Simone Joyce told the senate committee that her company has decided the RDTI was “too risky” since the startup began attracting customers.
“We applied two years ago and were successful, and it was extremely helpful in our early stages. I chose not to apply last year because I decided it was too risky for a clawback to take place,” Ms Joyce said.
“Once you’ve moved past the paying users phase and start releasing software development with features and functions that are experimental and new, but building on top of experiments, that becomes hard to define as a research and development experiment.”
The government and ISA need to broaden the definition of “experiments” under the scheme, FinTech Australia chief executive Rebecca Schot-Guppy said.
“This should be broadly interpreted by the ATO and ISA to include companies that contribute to new and innovative services even when they are built on existing rails, and clearly must also apply to software-based innovation,” Ms Schot-Guppy told the hearing.
“Failing to do this will see Australian jobs move offshore, and see our existing talent underutilised.”
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I agree with your position on assessment and support for software R&D. However repeatedly talking about innovation damages the argument. Innovation is not a component of assessment of eligible core activities under the RDTI.
The solution to the clawback risk is to ensure that the evaluation process (for what is or isn’t eligible) is sufficiently rigorous.
If the process needs more investment in people, skills, and systems to ensure that it is sufficiently rigorous, then that’s a price that needs to be paid to get higher quality outcomes for all.
If a claim is later re-evaluated, and found to be “less eligible”… then there has to be some accountability from the people and processes that found it eligible in the first place (except/unless blatant fraud was involved in the original application).