Statutory board Innovation & Science Australia (ISA) will be given the same power as the Australian Tax Office to set precedent on claims for the research and development tax incentive, as start-ups face uncertainty around reforms aimed at saving $2.4 billion over four years from the $3 billion-a-year scheme.
Businesses with turnover of less than $20 million a year avoided in Tuesday’s budget the “worst case scenario” of reforms proposed by ISA in 2016, with a cap on annual R&D refunds set at $4 million from July 1 instead of the feared $2 million, the ignoring of a recommended lifetime cap on refunds, and the rate unchanged at 13.5 per cent above the company tax rate.
However there was still uncertainty around the “crackdown” on rorting mentioned by Treasurer Scott Morrison in his budget speech, which the ISA’s new powers would hopefully clear up, according to chief executive of start-up peak body StartupAUS, Alex McCauley.
“The R&D incentive legislation is too slanted to the ‘R’ – it’s clearly based on the research model of new knowledge, a hypothesis-driven, scientific experimentation-based approach, and that’s not a clear fit with development and commercialisation, particularly software development,” Mr McCauley told The Australian Financial Review.
Genuine development work had been eligible for an R&D refund in the past, but less so since the ATO issued a directive on the scheme last year which saw claims from software start-ups for activities like beta testing begin to get rejected.
“Software has begun a square peg in a round hole, and the stakes are really high here for startups and founders who often rely on this scheme for the survival of their business in its early stages,” Mr McCauley said.
ISA, which is chaired by CHAMP Private Equity founder Bill Ferris, will now be able to issue public guidance and make binding rulings on what is and isn’t eligible to be claimed under the R&D tax incentive, according to a Treasury fact sheet attached to the budget papers, although no extra funding was provided for it to do so.
‘We’ll need swift and decisive action’
“We’ll need swift and decisive action by ISA to hammer home that digital start-ups, and the job-creating development work they are doing, are a core part of this scheme,” Mr McCauley said.
It is unclear how much integrity measures will comprise of the budget’s projected $2.4 billion saving over four years from the R&D incentive, but Mr McCauley said the new R&D intensity threshholds on claims from businesses with turnover above $20 million a year appeared to represent most of the windfall.
Companies that spend less than 2 per cent of their business expenses on R&D will from July 1 only be able to claim a tax offset of 4 per cent above the company tax rate, down from the blanket 8.5 per cent that previously applied.
However, the rate ratchets up to the extent that big R&D spenders will now be better off: companies funnelling more than 10 per cent of business expenses into R&D can now claim a tax offset at 12.5 per cent above the company tax rate.
The new intensity threshholds added complexity to an already complicated scheme and could see some moderate R&D spenders conduct future experiments in other countries, according to R&D partner at professional services firm BDO, Nicola Purser.
“A good example of the questionable rationale being applied is that we can now have a scenario where two large companies are conducting similar R&D programs and, depending on presumably group expenditure, one may get a 4 per cent cost underwrite whilst another will get a 12.5 per cent cost underwrite, due to factors completely unrelated to the R&D itself,” she said.
There was unalloyed joy at the R&D reforms from Australia’s biotech sector. Claims against clinical trials conducted in Australia will be carved out of the new $4 million annual cap on refunds, after intense lobbying from the sector.
“By exempting clinical trials from a $4 million cap and encouraging higher intensity in R&D, Australia will keep its hard-won momentum in clinical trials and continue its growth in commercialising medical research,” said chief executive of peak body AusBiotech, Glenn Cross.
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