• Executives from tech companies including Atlassian, Canva and Culture Amp have written a letter to Prime Minister Scott Morrison opposing proposed cuts to the research and design tax incentive.
• The scheme provides a tax rebate to companies on eligible R&D spend.
• Here’s why these tech organisations are opposing the cuts.
• Visit Business Insider Australia’s homepage for more stories.

A group of executives from 14 different organisations in the tech industry have signed a letter opposing the government’s proposed cuts to the research and design tax incentive (RDTI). Here’s why.

StartupAUS CEO Alex McCauley explained that the RDTI is a rebate scheme for companies doing research and development (R&D).

“It encourages companies to make new products or improve on products using experimental methods,” he told Business Insider Australia. “It’s really about trying to encourage creativity, innovation and the development of new products here in Australia.”

McCauley referred to it as an indirect R&D incentive because any company doing R&D is eligible.

“You don’t have to pitch your project before you get the funding,” he said. “If you’re doing qualifying R&D, then you’re you are automatically entitled to the rebate.”

McCauley described what makes an innovative technique or product qualify for this scheme.

“There’s an element of experimentation that you’ve got to document,” he explained. “You’ve got to have a hypothesis in it when you set out to do the experiments and then you’ve got to have results and iterations based on the outcomes of the experiment.

“And if you’re doing that as part of your product development process, you’re probably doing innovation that qualifies for this tax incentive.”

From there you can apply to the Department of Industry to get the rebate.

“It’s quite generous,” McCauley said. “It’s up to 43.5 cents in the dollar for eligible activities for smaller companies under $20 million in turnover, and 38.5 cents in the dollar for larger companies over $20 million in turnover.”

How tax incentives are beneficial

McCauley explained that the incentive “makes a lot of sense to encourage the development of new products” from an economic perspective.

“You want to make sure that a good share of those products are being produced here in Australia to try and grab some of that global market for Australia’s national interest,” he said.

Professor Beth Webster, Pro Vice Chancellor for Research Policy and Impact and Director of Swinburne University’s Centre for Transformative Innovation, told Business Insider Australia that governments don’t subsidise R&D to increase business profits.

“This is not industry welfare,” she said. “They subsidise R&D because it leads to better products or cheaper products for consumers.”

Associate Professor Russell Thomson, also from the Centre for Transformative Innovation at Swinburne University of Technology, explained that while businesses may be interested in maximising the amount of revenue or profit they make, we need to look at the tax incentive scheme “objectively, from a societal perspective.”

“That’s reiterating the basic economics that we’re not giving them the subsidy because we like them, we’re giving it to them because we know that R&D is good for society, it’s good for the economy overall,” he told Business Insider Australia.

Webster said there’s “good evidence” that when one company does R&D, it benefits more than just themselves. It benefits their competitors who may imitate them, allied industries that might get a business tool that makes them more efficient, and other hand-to-predict positive effects.

“Sometimes you look across at another industry that’s not your industry and you get an idea and that allows you to innovate and produce better, cheaper products too,” she said.

Webster also responded to those who might question why the government should subsidise tech companies for something that they would already do.

“The fact that some people can say, ‘Oh well they’ll do R&D anyway, why should we subsidise it?’ is beside the point,” she said. “The question is how much extra R&D are they doing as a result of the government subsidy?”

Webster added that “Australia does not spend a lot on supporting innovation and R&D compared with overseas countries” and suggested other ways governments can support innovation such as loans, beefing up growth centres or subsidising collaboration between businesses.

What the government is proposing

A review into the R&D Incentive was conducted in 2016. The federal government then announced reforms to the scheme – designed to improve its effectiveness – as part of the 2018-19 Federal Budget.

Legislation to support these changes were first rolled out in September 2018, with revised legislation rolled out again in 2019.

Under the proposed changes to the R&D scheme is the creation of an “intensity test” for businesses and , and the introduction of a $4 million cap on small companies. Currently, McCauley said there is no cap on small business claims.

“The biggest change is that they want to introduce a test which identifies how much of the business’s total expenditure is expenditure on R&D,” McCauley said. “This is called an R&D intensity test. So for highly R&D intensive businesses, the scheme will be more valuable than businesses with a low R&D intensity.

“That’s problematic for lots of claimants of the R&D tax incentive because it’s likely to reduce the total amount that they’re eligible to claim. So for businesses who have a modest R&D budget, but which are doing more work to help bring new products to market or improve their existing products, they might only spend 5% or 6% of total expenditure on R&D, so they’ll see a significant drop in their total claimable amounts of R&D.”

The proposed changes are currently under consideration by the Senate Economics Legislation Committee.

What the tech companies are calling for

On Friday, executives from 14 tech organisations including StartupAUS, software giant Atlassian, design powerhouse Canva, people and culture platform Culture Amp and fintech Airwallex sent a letter to the federal government, raising concerns about the amendments to the RDTI.

“Our specific concerns with the bill’s cost-cutting provisions include the impacts on smaller companies of the effective reduction in their tax offset rate (as a result of linking the tax offset rates to corporate tax rates) and the imposition of a new cap on refundable amounts, at a time when many SMEs are struggling to survive and retain staff,” the letter said.

The signatories also claimed the bill “fails to address the issues raised by the tech industry around ensuring that software development qualifies under the program.”

“We’ve seen gradually a narrowing of the interpretation of what qualifies as research and development when it comes to software in the last few years,” McCauley said. “And that’s led, in the last probably two years, to a really unfair application of the law where companies are now being retrospectively asked to pay back money for claims made three or four years ago because the interpretation of the definition has gradually tightened.

“There are these retrospective audits and then retrospective claims for potentially millions of dollars.”

The letter called for short and medium-term measures the government could use to boost research and design and the innovation economy. These include paying early refunds in advance of the tax cycle, having a moratorium on RDTI clawbacks – having to pay back money – and increasing the level of support available in the RDTI program.

The organisations are also looking for “some language to be inserted into the programme, which clearly identifies the kinds of software development which will qualify under the scheme”, McCauley added.

Culture Amp founder and CEO Didier Elzinga mentioned that the tax incentive has allowed many companies including Culture Amp to invest in creating technology.

“The government has provided much needed immediate support in the form of JobKeeper, which is great,” he said in a statement. “Now we need to turn our attention to measures that will stimulate recovery over the medium to longer term – the R&D Tax Incentive is designed to do this.”

Atlassian cofounder and CEO Scott Farquhar said in a statement that slashing R&D “makes no sense”, particularly as the government looks for ways to rebuild the economy.

“The technology industry is a fast-track to Australia’s post-pandemic recovery,” he said. “It’s a massive force multiplier for jobs and already makes up six percent of our GDP, a number which could be much higher.

“Doubling down on our investment in innovation now will reward our nation 10 fold into the future.”

A “bizarre time” for changes to the tax scheme

McCauley said it is a “bizarre time” for governments to consider reducing investment “in our future economic prosperity.”

“This is the single biggest programme that any government in the country has dedicated to investing in new technology and new products,” he said.

He added that even before the coronavirus pandemic, Australia globally underperforms other OECD countries when it comes to how much it spends on R&D. “We do about 1.8% of GDP on R&D – the OECD average is 2.3%,” he said.

The tech organisations have also focused on the treatment of software under the RDTI which McCauley said isn’t actually addressed in the proposed changes but “which has been slipping away from software companies in terms of their ability to claim” under the scheme.

Utlimately, McCauley believes “now’s not the right time to be to be putting those changes forward”.

“This isn’t the right time and these are not the right changes and we should abandon this bit of legislation – that’s the first step,” McCauley said.

The next phase is examining how companies are supported under the RDTI.

“We need to take a really serious look at how we’re supporting the most innovative digital tech companies through this programme and have a collaborative process between government and industry, where we fix some of the things that are clearly broken about the scheme when it comes to delivering outcomes for software companies,” McCauley said.

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