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Government backflips on R&D tax changes

Government backflips on R&D tax changes

Software and IT industries welcome Government’s major changes after widespread criticism

The Government has released a significantly re-written second draft of its highly unpopular proposed R&D tax concession changes.

The move comes after a rare admission by the Government that its original changes went too far and would have caused “unintended consequences” if allowed.

A total of 131 submissions were received on the issue, most of which condemned the proposed changes to the R&D tax concession rules.

“The draft legislation is a kick in the guts for business,” PwC national R&D leader, Sandra Mason, said at the time. “If you read what [the Government’s] aims are – revenue neutrality, increasing and expanding business investment on R&D, and bringing global innovation dollars to Australia – none of those have been achieved.”

According to a statement, Innovation Minister, Senator Kim Carr, said the highly negative feedback was a cause for the major changes. Some of the modifications to be made include a revised definition of core R&D using clearer language and dispenses with a range of overlapping tests.

The Government also decided not to extend the exclusions list to supporting activities and to narrow the scope of activities to which the new dominant purpose test will apply.

“The Government has adopted a range of changes to make the legislation clearer and align more closely with the stated intent of the policy,” he said. “We have concluded that the augmented feedstock rules should not be necessary.”

“[The new draft] takes a new approach to software R&D. Generally, software R&D will be subject to the same rules as all other kinds of R&D, but will be subject to a more targeted exclusion for certain in-house software.”

Australian Information Industry Association CEO, Ian Birks, said the group had not fully analysed the changes yet but approved of the Government’s backdown.

“It’s too early to say in terms of detailed wording but generally this is a positive outcome, particularly for the ICT sector,” he said. “It’s pleasing the Treasury and Department of Innovation have listened to our concerns and it seems they’ve come up with a better model.

“We’ll conduct some industry consultation and a more detailed review.”

Birks said the relaxing of requirements for software providers was a major step forward, but the caveat excluding “certain in-house software” would need further investigation.

“I think the intent is that it would exclude large-scale in-house business as usual software upgrades and if that is what it does, then that’s fair and reasonable as I don’t consider that R&D,” he said.

eCorner is an Australian ISV. Its managing director, John Debrincat, said the company made a submission to the Department of Innovation and that most of his recommendations appear to have been implemented.

“I haven’t read through the new draft version, but the core issues seem to have been addressed,” he said. “They’ve put some exclusions around software developed solely for internal use and that is in line with what we were recommending.

“We had a very direct consultation meeting with both Treasury and the Department of Innovation and they were very attentive at that meeting. They took on board the input from a wide range of companies,” he added. “I don’t think [the potential effect on software R&D] was ever intended. I think they put some words into the draft that concentrated more on other areas.”

Comment was sought from the Shadow Innovation Minister, Sophie Mirabella, but she was unable to reply by time of publication.

The “New Research and Development Tax Incentive: Second Exposure Draft” can be found here. Comments must be submitted to The Treasury by April 19.


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Tags eCornerPwC national R&D leaderInnovation MinisterSenator Kim CarrSandra MasonAustralian Information Industry AssociationR&D tax concession changesNew Research and Development Tax Incentive: Second Exposure Draft

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