Kate Carnell calls for whole new software-focused R&D tax scheme

Small Business and Family Enterprise Ombudsman Kate Carnell has weighed in on the debate around the research & development tax incentive (RDTI), calling for a new, industry-specific scheme for businesses focused on software.

In a submission to the Select Committee on Financial Technology and Regulatory Technology in December, Carnell noted the RDTI “in its current form is unsuitable for software development”.

Indeed, businesses that used the incentive for software research have in the past been ordered to repay funds received under the scheme.

Either eligibility requirements for software technology need to be changed, Carnell wrote, or a new software-specific initiative should be introduced.

In a statement on Monday, Carnell pointed to the ongoing confusion around the RDTI, saying changes are required to make the scheme easier to navigate.

About half of all RDTI claims come from business in the software development industry, Carnell said, and 80% of all RDTI claimants are SMEs.

“A transparent and predictable system is absolutely vital to those businesses.”

‘The bar has gotten higher’

Speaking to SmartCompany, Right Click Capital partner Benjamin Chong says the issue isn’t necessarily that R&D activities around software are not eligible for the RDTI scheme in its current form, but rather, “the bar for claiming has, in practice, gotten higher”.

Auditors for the scheme are focused on ensuring claims are related to software development that involves ‘scientific innovation’ and risk, he explains.

If a business has been clinical about documenting its processes right from the beginning, and has all the right paperwork in place, claiming the RDTI may not be too onerous a process. But if the company decides to claim the incentive in retrospect, “it’s very difficult”.

With this in mind, Chong broadly supports Carnell’s suggestion that software businesses should have their own category or scheme — going through the assessment in a slightly different way — in order to provide clarity on what is claimable.

“There is a lack of clarity about some activities being counted and other activities not,” he says.

This is at a time when more confusion and uncertainty are the last things any business needs.

That said, implementing a new scheme would mean yet another consultation period, and more back and forth between industry and legislators, before anything comes to fruition.

Chong says it’s important enough an issue to warrant the time it takes, and not everything has to drag on for years.

“If you start now, we might have it by the end of the year,” he suggests.

“That would be superb.”

A case for the economy

This week’s call from Carnell follows years of discussion around the RDTI scheme, which has been under the microscope since 2016.

For the first nine months of 2020, the Aussie tech industry was under the cloud of a Senate Economics Legislation Committee, which was mulling over a set of controversial changes to the scheme.

The committee was originally due to release its report in April, but the COVID-19 pandemic saw that delayed until August, and again until October.

Ultimately, the Federal Budget canned the changes before the reporting date rolled around, much to the relief of a tech industry struggling in the midst of the pandemic.

However, the budget did not address the confusion around software.

As Australia emerges from economic crisis, making the right move here could be a boost for the country, Chong says.

“Various arms of tax incentives and policy can aid in the bigger picture of wanting to drive economic growth and prosperity,” he explains.

“Anything we can do to encourage this type of activity is going to have a positive and potentially profound economic impact on the country.”