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Senate recommends more clarity for software startups on RDTIs

The Senate Committee on Financial Technology and Regulatory Technology has recommended that the Australian Government provide greater clarity around the Research & Development Tax Incentive (RDTI) eligibility guidelines to ensure software innovation and creation is supported in Australia.

On Wednesday, Liberal Senator Andrew Bragg tabled an interim report covering tax, regulation, access to capital, skills and talent and culture. The report also discussed the impact of COVID-19 on the FinTech and RegTech sectors.

The RDTI was a key issue raised in the evidence to the committee.

Annually, the Australian Government pays $2 billion in RDTI offsets. The main component of the RDTI is the tax offset for eligible entities, lodged in their corporate tax returns.

The Committee received a number of submissions explaining the importance of the RDTI program.

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In their submission, FinTech Australia identified the RDTI as “the number one regulatory issue for FinTechs in the Fintech Census for the past three years”.

“The importance of the R&D tax incentive to the industry cannot be underestimated, as evidenced by the large number of fintechs who have successfully applied or are in the process of doing so (64%).

“Further to this, 76% of fintechs indicate that the R&D incentive helps keep aspects of their business onshore. An absence of an effective R&D scheme would significantly hamper innovation and monetisation of Australian fintech offerings.”

The Australian Investment Council also emphasised that the RDTI was critical to Australia’s innovation ecosystem.

“The R&D Tax Incentive encourages considerable investment into the development of new products and services across countless sectors of the economy, which is essential for the economic transition that we need to make towards a more knowledge-based high value-add market.

“The R&D Tax Incentive regime is a strong and compelling commercial driver for attracting offshore R&D programs to relocate to Australia and undertake their activities here. This has the effect of helping to transfer knowledge and skills into the local market.”

However, many submissions pointed out how defects in the legislation may exclude  software R&D.

Airwallex, one of Australia’s fastest growing FinTech start-ups, reported that the RDTI was particularly difficult to interpret for software R&D claims.

“The R&D Tax Incentive is one of the largest programs supporting the growth of startups in Australia, but can be difficult to correctly interpret, even with external consultation. It is often unclear what claims are considered appropriate under the scheme, particularly in the case of software R&D claims.”

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StartupAUS submitted that the RDTI definition limited innovation.

“[It] incorrectly limits the definition in favour of research and invention focused R&D, ignoring development and innovation focused activities (which are often more directly commercially applicable.”

FinTech Australia expressed a similar dissatisfaction with the way software companies are treated.

“[T]he current definition of ‘experiments’ prevents software companies from claiming this incentive which has the result of hampering innovation.”

Thus the Committee recommended that the RDTI legislation should be amended to make software development a core R&D activity.

“While the incentive appears to support the early phase of experimentation and development of a product, the committee believes there needs to be greater clarity around the point at which software is seen as innovation and the point at which it is not. The committee considers this additional clarification is required to clarify when and how the R&DTI is applied to software development in relation to FinTech businesses to ensure genuine software creation by Australian startups is reliably supported.”


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Ann Wen
Ann Wen
Ann is a journalist at Dynamic Business with a background in commercial law and research. She is interested in SME tax law, public policy and Australian innovation.