Changes to the Federal Government’s research and development tax concession scheme could harm SMEs in the internet industry and threaten the investments being made in broadband and software development, an industry leader has said.
The Australian Information Industry Association also claims the new laws will add unnecessary complexity and uncertainty and raise the compliance burden for SMEs.
Chief executive Ian Birks says the new laws will see smaller businesses suffer due to excluding software services and requiring companies to determine whether activities pass four threshold tests.
“We are deeply concerned about the way the research and development changes are being portrayed, and I think they have the potential to be a serious inhibiter to innovation and development of software technology in the country.”
“The eligibility criteria have become significantly more demanding. It’s a bit technical, but the criteria includes things like having to demonstrate a high level of innovation, and a high level of risk, whereas before only one was necessary.”
The new scheme will allow a company to deduct at least 125% of the amount spent on R&D expenditures. Businesses with turnover less than $20 million can access a 45% refundable tax credit, with companies with revenue over $20 million can access a 40% credit.
However, these concessions come with several new requirements. The activity must be additional to normal R&D undertaken by a firm, while the activity must also have benefits which can be shared by other companies or the community – two requirements Birks says are cumbersome to smaller companies.
Additionally, Birks says the “multiple sale” test, which requires a piece of software covered under the grant to be available for multiple sale, is contrary to how much of the industry operates.
“This multiple sale test is at odds with new business models, such as companies developing software free of charge in iPhone apps, web-based software and so on. Under this new test these companies would be excluded from eligibility.”
“There is just a general raising of the bar that is being put into place to stop people rorting the system. The unintended impact is that it will restrict businesses being given funds that they need.”
Birks says the majority of innovation in the industry is being produced by small- and medium-businesses, which will be unfairly impacted by the new criteria.
“I think it’s probably true that large corporations will find a path through some of these changes, whereas SMEs which have been previously able to get these grants will feel an immediate impact.”
Additionally, the R&D changes could exclude some previous activities covered under the program, such as building websites. The new grants will also focus on the “research” phase of activities and not the “development” phase, a category many ICT companies fall under when it comes to R&D activities.
Companies will also need to prove their activities are either “core” or “supporting”. Core activities must display novelties and high amounts of risk, while supporting activities must prove their dominant purpose is to support core R&D.
“The system does need to be changed to stop rorting, but most of that rorting has happened outside of the technology sector. There is a need to tighten the rules around how these grants are applied, but what we’d like to see is an understanding of how the software sector works.”
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
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