RSM Australia

Budget falters on R&D tax (and how this impacts startups)

Tax Insights

It’s the third budget handed down by Treasurer Scott Morrison and for those of us in the innovation space, a whole lot to digest.

After poring over the detail, I’ve created a summary of notable items for your reading pleasure (disclaimer: it’s not all pleasant).

Slow death for Australian Innovation?

The familiar catch cry, ‘innovate or die’ has elevated the status of innovation to a non-negotiable activity that contributes to the ongoing success of a startup or company.

While there is collective agreement that it is indeed requisite and there is a willingness to take risks/invest by startups, will there be on-going support to enable innovation, or has research and development been relegated to make way for a shift in priorities?

The budget announced a reduction to R&D tax claims benefits, commencing from 1 July 2018 (assuming that legislation is passed) and for startups this translates to a reduction in the R&D rebate from its current 43.5% to 41%. 

ExampleBudget falters on R&D tax (and how this impacts startups)

A startup, with no income, carries out R&D between 1 July 2018 and 30 June 2019 and spends $100k. 

The startup is an incorporated company and lodges it’s AusIndustry R&D registration once the financial year is finished.

Under the current R&D tax legislation that cash rebate would be $43,500, foregoing the $100k of tax losses.

Under ScoMo’s new regime, this makes it eligible for a $41,000 cash rebate, while still foregoing its $100k of tax losses.

Hold onto your hats (or caps as the case may be)

In addition to this reduction, a cap has been applied to the yearly R&D cash rebate that a company can receive. The cap? At $4m. 

This will likely only impact those companies spending more than $9.75m per year on R&D.

The application of caps, together with a reduction to benefit amounts are both measures that increase the risk of losing local R&D to overseas competitors.

Big deal... or not?

Look, I know that some are reading this thinking, big deal, not really a lot to worry about here, and on the face of it, the changes may seem ‘minor’. However, the messaging is concerning.

 “It is not about writing blank cheques to everyone that has a good idea”
- Scott Morrison 

The scheme is valued for its benefits to startups, reinvestment in job creation and development of globally competitive technologies. And while many agree that the R&D tax should be appropriately policed, few could argue that cuts and caps to benefits reflect an ongoing and sustained commitment to the scheme and to startups.   

It’s curious. Is the government making these changes to fill other holes in the budget; the seemingly small reductions acting like a smoke screen?

And is it that there is an apathy or an ignorance to the big impact of this little reduction to founders?

People are willing to put themselves at personal financial risk to drive successful innovation, which after all will generate future taxes.

Keep your house in order

Startups beware. The promise to apply increased scrutiny on compliance with the R&D tax requirements is backed by a budget increase in funding for ATO and AusIndustry to review and audit claims. 

While I won’t argue against maintaining the integrity of the scheme and ensuring that it is given to the right people for the right reasons, I do wonder… are claims that the scheme is being exploited founded or just urban myth; perhaps it is costing the government so much because it actually works?

Anyway, better to be safe than sorry. Budget falters on R&D tax (and how this impacts startups)

Startups need to:

  • Ensure absolute certainty that all R&D activities and costs are eligible
  • Ensure accurate and adequate record keeping on the conduct of all R&D activity
  • Ensure accurate and adequate financial record keeping to demonstrate that
    • costs have been incurred and
    • they are related to the R&D
  • Keep calm and be armed. Don’t be surprised if either the ATO and/or AusIndustry send a request for information and require you to spend time proving you are eligible for the R&D deduction.​

Read between the lines

A small addition in the budget, which has so far gone unnoticed, is a provision permitting the ATO to publish a company name and the amount of R&D that it has claimed. Breach of privacy or increased transparency in the system?

It is an interesting position; startups will no doubt have mixed emotions about this inclusion. A perceived benefit is the ability to analyse the ecosystem and provide real data.

The elephant in the room is the uncertainty and risk/loss of privacy.  A published list of R&D tax claiming companies is surely likely fodder for marketing and the unsolicited cold calling of service providers.

Other options

It is worth making comment on some of the suggested changes and improvements that were debated and the impact on startups:

Loosen the R&D tax eligibility for startups: There are some that would suggest that the R&D Tax support should be broader to include commercialisation as well as less technically innovative R&D.

Suffice to say that this opinion is not shared by everyone, including me. The scheme in its current state is very generous and targets R&D for the development of new knowledge of a technical basis.

Expanding the inclusions of the R&D tax legislation would certainly add complexity and risk to the scheme. Capturing non-R&D and commercialisation support, should economic reasons be adequate, may be better served by some other grant or tax incentive programs.

Provide the R&D cash rebate in quarterly tranches: this one is seen as a way to help startups with cashflow issues by bringing forward their future R&D tax claim. 

Sounds like a good idea on the face of it. But the devil lies in the detail; from a compliance and risk perspective it would be extremely challenging to apply this change. 

Fortunately, the market has resolved this problem and now a number of R&D tax rebate debt funding options are available to help companies bring forward their future R&D tax cashflow.

And so to finish…Budget falters on R&D tax (and how this impacts startups)

My expectations of the budget were low and with negative reports and comments coming from Innovation and Science Australia about the R&D Tax Incentive, there was fair warning that we may be faced with bad news.

Australia is building a great innovation and startup community and there is no doubt that its success does and will build prosperity for all Australians.

I’m interested to see how the changes unfold and the real impacts to our startups. I feel though that the blinkers are now on, restricting long-term vision of the economic reasons to support innovation in order to squeeze out a few pennies to fill short-term budget holes.


RSM in Sydney - providing accountanting, auditors and consultants for sydney Businesses