R&D tax incentives

Updated: Jun 27, 2019

Key takeaway 

Contact the author Tim Morrow


The government is contending that particular businesses are not adhering to the legislated definition of R&D, however, are still claiming the tax incentive. This leads to the question - is the R&D tax incentive appropriate for the development of innovative solutions in the modern day (i.e. software as a service businesses)? Venture Advisory believes it is essential to keep nurturing and support companies trying to break fresh ground to secure our long-term prosperity as a country.


Changes to the R&D tax incentive and its current role in the technology community

A key issue for the start-up and technology community in December was the scrutiny that the Research and Development (“R&D”) tax incentive has faced in its application for software companies. The Department of Industry, Innovation and Science and Australian Tax Office (“ATO”) has been requesting that a number of Australian companies pay back portions of the R&D tax incentives that they have received, according to The Australian Financial Review (“AFR”). The R&D tax incentive is a tax rebate given to companies that have invested in developing new, unproven ideas and technologies. The Government’s request for a crackdown on software companies that are claiming the incentive is due to the Government’s belief that companies are claiming expenses for activities that are not “R&D”. This is not specifically a new issue. The ATO flagged in 2017 that it was undertaking a review of what expenses were eligible for the incentive, specifically relating to the development of software.

The key focus of the ATO has been the experimental requirements of the R&D tax incentive, which the Government believes is not satisfied by many companies claiming the incentive, where a large part of the business revolves around the development of software. The experimental requirements being applied were developed for, and are well suited to, traditional scientific research and experimentation, but less relevant to a digitally innovative environment, where best practice utilises ‘lean start-up’ and ‘agile’ methodologies – the opposite of traditional processes. This begs the question – given the changing nature of innovation and its role in software and technology, is the experimental test the correct test for the current competitive business environment?


The renewed focus on compliance by software development companies using the R&D tax incentive has been coupled with the Government’s change in the policy of the incentive, which has created further scrutiny on the entire R&D tax incentive process. The Government decided to make changes to the incentive in the May 2018 budget, which were intended to save $2.9 billion between 2018-19 to 2020-21 by reducing the grant for claimants and increasing compliance levels. The changes in the budget mean that companies with a turnover of $20 million or less have R&D refunds capped at $4 million. This may lead to greater funding requirements for start-up businesses undertaking significant capital-intensive R&D and may result in a less competitive business environment.


The AFR reported that numerous software companies are being audited to ensure that the R&D refunds given were done properly. This has led to software companies being asked to repay millions of dollars to the Government, which compounds issues for loss making start-up business attempting to achieve ambitious goals.


We believe that there should be strong institutional incentive structures to allow innovative businesses to thrive in Australia without having the confines of needing to be undertaking a purely experimental activity based on historical “pre-digital” scientific standards. There is usually significant risk in the business strategies so the ability of the Government to offer tax rebates creates a competitive environment.


R&D policy’s impact on the competitiveness of the Australian technology sector

To encourage innovation in Australia, the Australian Government should be encouraging investment in innovative technologies. There should obviously be checks and balances on any policy that allows rebates to private organisations, however it should be relevant to the nature of business as it changes over time and should not be overly prescriptive to exactly “how” R&D is to be done – the government definitely isn’t a shining light of innovation! Products and systems that improve the efficiency of the Australian workforce should be included in any R&D tax incentive. The improved efficiency should lift our labour force productivity inherently having positive impacts on our economy, hence being worth investment from private organisations. Many start-ups rely on these incentives to fund a portion of the non-proven and experimental products that are being developed, offsetting high development costs, so removing these will inherently hamper innovation in Australia. Any significant reduction in the ability of companies to obtain R&D tax benefits will further erode the competitive position of Australian companies and incentivise companies to undertake software development using lower cost offshore resources, ultimately resulting in a worse position for the Australian economy.


This is particularly alarming to us at Venture Advisory given that it should be an imperative of the Australian Government to transition our economy away from a reliance on metals and mining.


These relatively small savings in the budget overall could be acting as a handbrake on the development of a technology sector that can help support the development of the economy into the future.


What can the Government do to support the Australian start-up sector?

There needs to be a diverse range of policies by the Government that supports the private sectors continued innovation in several fields. This could be a range of policies from tax incentives for investors to developing curriculums in high school that allow children early access to coding programs. We should not be discriminating between the type of innovation but allowing innovation to take many forms. Government needs to move with the times and ensure their policies and procedures for R&D assessments conform to current practice for innovation and development.

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