Software-specific R&D tax incentive proposed for SMEs in tech

The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, has urged the Government to offer an industry-specific Research & Development tax incentive for businesses in the software development industry.

In a submission to the Federal Government’s Financial Technology Inquiry, the ASBFEO described the current R&D Tax Incentive as “unsuitable” saying that it has been hampering the growth and investment in software development.

“The R&D Tax Incentive eligibility requirements need to be changed so that it is clear and simple to claim tax incentives under the existing scheme,” Carnell said.

The Ombudsman also called for the creation of a dedicated software development incentive to promote investment and growth in the sector.

“With 80 per cent of all R&DTI claims made by Australian SMEs, it is clear that many small and family businesses rely on the R&DTI to help fund their research and development,” Carnell said. “About half (48 per cent) of all R&DTI claims come from the software development industry, so a transparent and predictable system is absolutely vital to those businesses.”

The Ombudsman’s recommendations have gained the support of industry peak bodies and private tech sector heavyweights, including Atlassian.

“We welcome submissions supporting my office’s long-held position on this issue, including Atlassian’s reported ‘strong endorsement’ of an interim recommendation to clarify the existing scheme and put a time-limit on any potential clawback action,” Carnell said

“At the end of the day we want small businesses to grow into big businesses such as Atlassian and a fit-for-purpose R&DTI scheme is a key support mechanism.”

The ASBFEO’s R&DTI report, released in December 2019, had found that many small and family businesses were subjected to examination and audit several years after the R&D was undertaken and the R&DTI refund had been spent. These affected businesses were often required by the ATO to repay the R&DTI in full, with a severe penalty applied.

“This has had a devastating impact on the businesses involved, with some discontinuing or scaling down their R&D efforts in Australia and reducing their R&D staff,” Carnell added. “Ultimately for SMEs to continue to invest in innovation and growth, it is critical they are supported in their R&D endeavours.”