Budget 2020: Addressing the R&D Tax Incentive debacle is the “number one priority” for startups

The 2020 budget is just around the corner, and it will come as no surprise that, according to StartupAus chief Alex McCauley, the most pressing issue for startups is the R&D Tax Incentive (RDTI).

It’s something we’ve been talking and writing about for what feels like years, and on top of the ongoing uncertainty around the COVID-19 pandemic, uncertainty around amendments to the RDTI is causing confusion and concern.

The federal budget provides an opportunity to either bring some clarity to the picture, or better yet, scrap the changes altogether.

Speaking to SmartCompany, McCauley first notes that this year’s budget is unusual in several ways.

Aside from being in the middle of Australia’s first recession in decades, it’s in October, five months later than usual.

We can only assume that next year’s event will be shifted back to May again.

“I’m thinking of this as two budgets together, in a seven month period,” McCauley says.

Therefore, he’s anticipating some of the announcements made next month to flow through to the budget next year.

“It’s an interesting dynamic,” he says.

Bad timing for RDTI changes

It’s hardly surprising that McCauley highlights the RDTI scheme as the “number one priority” for this year’s budget.

It’s been up there for the past couple of years already, and it’s been a cause of much outcry from the startup community over the past few months.

Proposed amendments to the scheme would put a $4 million cap on repayments, and create a tiered system for the incentive.

A much-anticipated report from the Senate Economics Legislation Committee into those changes was due to be released back in April, but the date was pushed back to August because of the COVID-19 crisis.

The report has since been delayed again, twice, and is now scheduled to be released on October 12.

Prominent players in the Australian tech and startup scene have spoken out against the cuts, both in their submissions to the inquiry, and in an open letter to Prime Minister Scott Morrison.

Leaders of Canva, Atlassian, Airwallex, Culture Amp and Deputy, as well as McCauley himself, signed the letter, arguing that the changes would be detrimental to a sector critical to Australia’s post-COVID economic recovery.

Elsewhere, to add insult to injury, the ATO has admitted that any changes made will be implemented retrospectively, meaning many businesses that have claimed the incentive in this financial year will be liable to make repayments.

“Whatever the merits were of amending the RDTI to make it more efficient and to reduce the cost, it’s pretty clear that now is not the time to be reducing investment in Australia’s economic future, which literally is what a cut to the R&D Tax Incentive is,” McCauley says.

Because of the timing, he sees the proposed changes as “basically a non-starter”. The arguments against them are strong, especially in a COVID-19 context.

“I can’t see those getting past parliament,” he says.

“I would love to see those put on hold indefinitely, or scrapped.”

Software struggles

More specifically, with regards to the RDTI, McCauley has two main issues he would like addressing.

First, there has for a long time been some contention over whether software development counts as R&D under the existing scheme.

McCauley would like some clarity here, and to see software-based R&D activities considered legitimate under the program, once and for all.

Second, he would like the government to put a stop to retrospective audits of young software companies, and so-called ‘clawbacks’ of their incentive claims.

“These are just throwing the cat amongst the pigeons when it comes to certainty and security for those businesses,” he says.

“There’s never been a more important time for businesses to have as much certainty as they can.”

On both of these counts, the recent interim report from the inquiry into fintech and regtech made some “encouraging” recommendations, McCauley said, basically recommending both of the above measures.

Digital savvy and funding gaps

There are other things on McCauley’s budget wishlist too.

For example, something that could be a benefit both for small businesses and startups would be “for the government to pull some levers to enable digital enablement”.

Uptake of digital products among small businesses could help improve their productivity and efficiency, he says. And it’s startups and software companies that will be providing those products.

“If we can encourage more of that to happen pretty quickly, we can help rebound out of COVID, and at the same time help support the growth of both Australia’s digital business literacy and the software providers making that technology.”

StartupAus has also been making some suggestions to the government relating to encouraging more early-stage seed funding for startups.

While, anecdotally at least, startups have continued to secure angel funding throughout the pandemic, the number of seed funding deals that would usually follow them has “dropped off pretty substantially”, McCauley explains.

“There’s a bit of a gap opening up at that early-stage level, which we could look at addressing.”

Will Frydenberg seize the day?

This hasn’t been a government known for its innovative thinking. But, there’s an opportunity here to embrace the tech sector as a driver of growth and to double down on investing in it.

“It’s pretty clear that technology companies create jobs very rapidly,” McCauley notes.

Those tech companies that have been doing well throughout the pandemic have continued to hire and to grow, he notes.

And, globally, the soaring share prices of listed tech companies are a good indication of the importance of these kinds of businesses in a post-COVID world of remote work and online communication.

“One of the really strong arguments this sector has for its ability to help the country rebound is that these are companies built for speed, and built to adapt very fast,” he says.

“They do that by hiring people and building products.”

As Australia emerges from the COVID-19 health crisis, we’re running headlong into “some of the biggest challenges the economy has faced in a generation”, McCauley adds.

“We will need to really encourage as many people as possible to meet those challenges.”

So, the opportunity is there. Whether the federal government chooses to seize it or not is a different question.

But, McCauley is hopeful.

“I think government will probably want to explore as many avenues as possible for accelerating Australia’s economic rebound,” he says.

That may well mean support for lots of different sectors, including emerging tech, but also including mining, agriculture, manufacturing, and everything else.

There’s a temptation to scoff at these industries and ‘old economy’, he adds. But, at a time of crisis like this, it makes sense to keep everything ticking along as well as possible.

“The bits that will really take off are the highest-bang-for-your-buck bits,” McCauley says.

“We know that technology has really big multiplier effects in terms of dollars-in to dollars-out and jobs created,” he adds.

“The highest growth industries will return the best results.”

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