“A square peg in a round hole”: StartupAus chief Alex McCauley echoes calls for a software-specific R&D Tax Incentive

StartupAus chief executive Alex McCauley has echoed calls for a separate software-specific R&D Tax Incentive (RDTI) scheme, saying ongoing confusion is landing startups in debt and dissuading potential investors too.

Speaking at a public hearing of the Select Committee on Financial Technology and Regulatory Technology earlier this month, McCauley reiterated concerns about a lack of clarity for startups seeking to take advantage of the RDTI scheme.

He proposed two solutions: either to “fix the R&D Tax Incentive” by changing the language of the scheme to make it more supportive and easier to navigate for software-based companies; or to develop a whole new scheme specifically tailored to them.

“You could limit the scope of that to new firms, young firms or firms specifically doing software as their core business,” he suggested.

“That would cap the scope of the scheme so that companies right across the economy aren’t increasing their claims for business-as-usual software development.”

This could be the “more effective” solution, McCauley added. And, it’s something chair Andrew Bragg said the committee “would consider”.

McCauley’s comments follow a similar suggestion from small business and family enterprise ombudsman Kate Carnell, who addressed the committee back in December.

The RDTI in its current form is “unsuitable for software development”, she said at the time.

At the hearing, McCauley said the focus on research means navigating the scheme has “always been a bit of a square peg in a round hole for software firms”.

Currently, the methodology is based on the development of a hypothesis followed by experimental testing, he noted. That’s incompatible with agile methods typically used for software development.

However, over the past couple of years, he suggested claiming under the RDTI scheme has become even more difficult.

“The interpretation of what constitutes R&D in the act has started to narrow with the expansion of the cost of the scheme and the increase in the number of software claims.”

That’s made it harder for software companies to claim the incentive. Of all software claims that were audited, about half were rejected, he added.

That’s obviously a huge concern for the businesses involved, he said, “who now feel that this backbone support policy … is slipping away from them”.

But, it’s also off-putting for potential investors, who may consider historical R&D claims as “potential liabilities”, McCauley suggested.

“Up to seven years after the day of claiming [a business] could be asked to pay back in part or in full any of those claims.”

For startups — many of which are pre-profit, backed by venture capital, and growing fast — that’s a debt they can ill-afford.

“We’ve seen that this could run to millions of dollars.”