Victoria calls for software development to be classed as eligible R&D activity

The state's Minister for Jobs, Innovation and Trade echoed requests of others to have software development considered as an eligible research and development activity.

Victoria's Minister for Jobs, Innovation and Trade Martin Pakula has asked the Senate Standing Committee on Economics consider recommending tweaks to the definitions contained within the country's research and development (R&D) laws to encompass more of the tech sector.

In a submission [PDF] to the committee's probe into the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019, Pakula said those involved in software development, including the startup sector, have argued that the definition of eligible R&D activities does not capture legitimate R&D and is inconsistent.

"The perception that their software R&D is not eligible, as well as the financial risk of having to appeal decisions or pay back [R&D Tax Incentive] funding, is currently a deterrent to legitimate software R&D occurring in Australia," he wrote.

"The current Bill does not seek to resolve this issue.

"I support calls from stakeholders in the software and startup sectors that the legislation explicitly name software development as an eligible R&D activity, as well as recommendations from the Small Business and Family Enterprise Ombudsman that greater clarity should be provided on the definition of eligible activities to reduce uncertainty and return confidence to businesses claiming the concession."

Senate Economics Legislation Committee in February last year asked for the Bill to be taken back to the drawing board, saying at the time it recognised the need for government to maintain public confidence in the integrity and financial sustainability of the R&D tax incentive, but that it was not confident the introduced measures would provide exactly that.

The Bill remains mostly unchanged, with minor tweaks to premium offsets.

If passed, it would permanently increase the R&D expenditure threshold from AU$100 million to AU$150 million; link the R&D tax offset for refundable R&D tax offset claimants to their corporate tax rates, plus a 13.5 percentage point premium; cap the refundability of the R&D tax offset at AU$4 million per annum; and increase the targeting of the R&D tax incentive to larger R&D entities with high levels of R&D intensity.

"Leading multinational companies in Victoria undertaking R&D as well as other activities, such as manufacturing, sales, and technical support, report that the application of the proposed R&D Intensity Premium will dramatically increase their relative R&D costs in comparison with alternate international locations," the minister continued.

Pakula is also concerned that the introduction of the Intensity Premium inherently would make future tax concessions more uncertain, given that the "calculation of the expected effective tax rate is made more complex and made contingent on future non-R&D expenditure".

Calling it a "significant forgone opportunity", Pakula said that when compared to other like-countries, Australian businesses are much less likely to undertake R&D in collaboration with the research sector.

He said the introduction of a collaboration premium would entice more collaboration with research organisations.

The minister also backed calls that it should apply to the cost of employing STEM PhD, or equivalent, graduates.

"This is a glaring omission from the Bill, and one that stakeholders in the tertiary sector have raised as a concern," Pakula said.

Pakula said he supports the call from industry bodies for more extended and considered consultation and modelling on the sector-specific effects of the proposed amendments, or even the quarantining of specific sectors.

"Financing is a challenge for … tech-focused sectors, and diminishing sources of finance risks sending intellectual property and commercialisations activities offshore," he said. "The refundable concessions are particularly vital to SMEs that are yet to become cash-flow positive."

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