Government defends R&D law changes

Industry, Science and Technology Minister Karen Andrews has defended the government against accusations from the local tech sector that its proposed changes to research and development tax incentives do nothing to rectify problems with the scheme, claiming it has acted to encourage businesses to "back themselves" and invest more in R&D.

Speaking to The Australian Financial Review after announcing on Thursday last week that the government would have another crack at passing its controversial changes to the R&D scheme, Ms Andrews said the rules needed to be tightened to ensure that only genuinely innovative work was being rewarded.

"The R&D tax incentive, which has provided almost $14 billion of support to businesses since 2013, remains an important part of the government's support for R&D but as the Fraser, Ferris and Finkel Review found, in its current form, the incentive is subsidising 'business as usual' R&D rather than promoting investment in additional R&D," she said.

"We have listened to businesses and are introducing reforms to simplify, target and improve the system.

"The final Bill introduced into Parliament has also been refined to defer the start date so existing business decisions are not affected, and to simplify the intensity test."

There are few differences between the bill and an earlier plan that was rejected earlier this year, with the slated reforms still including an "R&D intensity" test on businesses with annual turnover above $20 million and a $4 million cap on claims for firms generating less than $20 million in revenue.

If the intensity test is passed, companies spending 9 per cent of business expenditure on innovation will received a tax offset on 42.5 per cent of that cost (assuming a 30 per cent corporate tax rate), better than the flat 38.5 per cent available currently.

However, if a company's spending on R&D is below 4 per cent like many claimants, the tax offset will drop to 34.5 per cent.

Critics of the intensity test say it is tough for companies to accurately calculate the proportion of total business expenditure that R&D will compose at the time of an investment decision, when their total business expenditure is only known with certainty at the end of a financial year.

"Whilst the intensity threshold has been simplified slightly in the new bill (one less tier), it remains unworkable," Swanson Reed tax principal Damian Smyth said.

Over the last few years, the government has cut more than $4 billion from R&D tax incentive scheme in the budget, but Ms Andrews said it had increased spending in other areas to help support innovation.

"Our reforms are aimed at boosting overall investment in R&D," she said.

"While making the RDTI more effective, the Government is also increasing funding for other major R&D programs. On top of our science agencies like the CSIRO, AIMS (the Australian Institute of Marine Science) and ANSTO (Australia's Nuclear Science and Technology Organisation), this includes the Medical Research Future Fund, the Australian Antarctic Division and university research block grants."

Companies with less than $20 million in revenue account for about two-thirds of the annual government spend on the R&D tax incentive and for many start-ups, the tax offsets are crucial.

Sectoral lobby group StartupAus released its annual Crossroads report last week, in which it claimed companies had begun to see R&D claims as too risky and were self-censoring.

This followed moves by the Australian Taxation Office to demand repayment of previously granted R&D incentives totalling millions, from companies including Airtasker and Digivizer.

"A common experience right across the sector is that R&D claims for genuine software development are being paired back substantially to try to reduce the risk of facing a potentially catastrophic clawback," the report stated.

To encourage investment again, StartupAus recommended a moratorium on R&D reviews by the ATO when companies turning over less than $20 million had received professional advice about their claims, unless the claims were "manifestly unreasonable", until the introduction of a "clear legislative fix" or a new scheme is created to directly support software development.

Responding to the slated changes, Shootsta co-founder Tim Moylan said start-ups finally had a clear idea of what the government was planning.

"That clarity is really important as uncertainty has really plagued the sector. Nobody wants to file a claim only to have it scrutinised and potentially reclaimed by the ATO," he said.

"I haven’t heard of an early-stage start-up that has been able to claim over $4 million in R&D. Most claims I’ve heard of come in at around less than $1 million, so the cap here is reasonable."

But FinTech Australia general manager Rebecca Schot-Guppy said the government's slated policies were already out-of-date because they were based on a review that's more than three years old.

"It needs to be revisited before any radical policy change," she said. "This policy really gets to the heart of Australia’s ability to compete with other nations. Getting it wrong risks seeing our fintechs – and the jobs they create – head offshore."