“Another massive kick in the guts”: Ongoing R&D debate causes more uncertainty for startups and for Australia’s economic future

Proposed amendments to the R&D tax incentive scheme have been kicked into the long grass, throwing even more uncertainty into the already turbulent tech space.

Early this week a Senate Economics Legislation Committee suggested changes to the incentive, specifically the proposed $4 million cap on the refundable tax offset, “would benefit from some finessing to ensure that R&D entities that have already made investment commitments are not impeded unintentionally”.

The proposed changes came as a response to a review of the R&D tax incentive scheme in 2016, which found it “did not fully meet its policy objectives”.

In the 2018 Federal Budget, the government announced a $4 million cap on cash refunds available to companies with an annual turnover of less than $20 million. The following July, it called for feedback on the proposed amendments to the incentive scheme.

While the changes could have negative consequences for the tech sector and for startups, and in a sense the delay is welcomed, there is also frustration at the lack of a resolution.

“This has been going on for years now,” StartupAus chief Alex McCauley tells StartupSmart.

“Clearly one of the things the sector needs, and companies need, is certainty about what’s happening.”

We should be looking for more ways to encourage R&D, McCauley says.

“We’re way behind the OECD average in terms of total R&D spend — a long way behind the leaders in the world,” he adds.

The delay means we might be able to have a “sensible conversation” about that, but he stresses this only holds true if that conversation ever happens.

“It can’t just be that it’s delayed, and that after the election whoever wins looks at it.”

James Cameron, partner at Airtree Ventures, tells StartupSmart any uncertainty “can be disastrous for startups in the short and medium term”.

In December last year, the Australian Tax Office cracked down on startups that had used the incentive scheme for software development.

According to Cameron, this rule against using R&D for software is “completely counter to what established practice has been”.

While it may be the “the letter of the law”, he says, “the government has been completely complicit in this”.

It’s one thing to change the law, or the way in which it is implemented, Cameron says, “but to do so and suddenly have a crackdown without any leading time is disastrous for many startups”.

However, he also notes that “clarity is key” and that delaying any changes to the legislation “again just leaves all sorts of uncertainty”.

From Cameron’s point of view, changing any policy is not inherently damaging. He’s supportive of having conversations about which policies will best support the startup ecosystem as well as the economy.

“And with an election around the corner, we should be having them now,” he says.

“But, we need to be able to establish some sort of clarity in the short term, so startups dependent on standard practices aren’t massively disadvantaged, and potentially disastrously so.”

An economic setback

This latest confusion about the changes to R&D tax incentives comes just days after StartupAus and a collection of huge players in the startup space issued a submission suggesting changes to the controversial AA Bill, passed in December last year.

“This feels like another massive kick in the guts for the whole startup ecosystem, where we know we need to be refocusing the economy in this country” Cameron says.

It seems “profoundly stupid” to move away from policy that has been supportive of startups in the past.

“I would call it a comedy of errors if it was in any way funny,” he says.

“It’s just been a series of disastrous setbacks for the innovation agenda.”

Cameron says he hopes this becomes an election issue, “because it’s so fundamentally important to our economy over the next 25 years,” he says.

“We need to be supportive of this because we can’t rely on an economy that’s based on pulling things out of the ground and selling them overseas.”

While Cameron says he always advises startups not to rely on any kind of cashflow sources that are out of their control, he also warns that new startups, and prospective founders, “can and will go overseas” where there are generous R&D tax credits available.

McCauley also notes this adds to the AA Bill debacle to create ongoing uncertainty for startups.

Australia is “right out on the edge of this”, he says.

The country is “one of the most restrictive environments for tech companies, from a regulatory perspective, in the world,” he adds.

“This is a real challenge when we’re trying to build a local tech sector that is globally relevant.”

McCauley agrees it will be the tech sector that leads economic growth in the future, but not if it’s stifled into non-existence.

“If we want to reap some of the economic benefits that come with tech, we need to be conscious of the fact we have to build an industry before we can start regulating it,” McCauley says.

The current regulatory narrative “doesn’t take into account that this could be a really strong domestic sector, but only if we encourage its growth”, he adds.

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