ICT industry fears cuts to R&D incentives

The Australian Information Industry Association (AIIA), the nation’s peak member body for the ICT industry, has voiced concerns about the Government’s plans to cut the $3 billion R&D Tax Incentive, and restrict claims for software R&D.

The R&D Tax Incentive is part of a mix of innovation policies seeking to improve the quality and quantity of R&D investments in Australia. It is a broad-based program that is accessible to all industry sectors where businesses get a refund or tax offset for undertaking R&D activities if requirements are met.

“Business R&D in Australia is already below the average of other advanced economies, and we have been in the midst of a R&D recession, with a 12 per cent (or $2.2 billion) decline in the latest data,” said Mr Rob Fitzpatrick, Chief Executive Officer of the AIIA.

“Restrictions for software R&D are particularly problematic as IT research is the biggest component of business R&D, and one of the few fields where research spending has grown over the last decade. ICT spending is now a significant proportion of GDP.

“Without adequate government support, businesses will underinvest in R&D in Australia because the full public benefits of new knowledge cannot be captured by private investors. As our ICT companies become increasingly globalised they will be encouraged to seek innovation incentives offered by other countries.

“ICT is a highly mobile, high skilled labour-based industry and businesses will move their scarce labour resources to where there is better support. R&D must be seen as an investment that can prevent this brain drain.

“The New Zealand Government announced on 19 April that it is reinstating its R&D Tax Incentive program. Once enacted there will be a good incentive for Australian ICT companies to relocate to New Zealand for a more supportive R&D scheme. As a result, Australia is at risk of losing its ICT companies to other countries if further cuts are made to the R&D Tax Incentive.”

Mr Fitzpatrick said industry acknowledges the importance of ensuring the R&D Tax Incentive is well designed, but constant changes are undermining the ability of businesses to invest with confidence.

“Efforts to restrict claims are supposedly motivated by concern that the system is being abused, but evidence has not been presented that this is a widespread problem – despite a number of requests – and the proposed changes will mainly punish legitimate research,” explained Mr Fitzpatrick.

“The AIIA and its members have been closely engaged with AusIndustry on the update of the guidance material on software R&D. Unfortunately it’s our view that changes were designed to restrict claims rather than to clarify them.”

Mr Fitzpatrick also said the ICT industry is particularly concerned with the proposed intensity test, which limits the R&D incentive to both large and small businesses with a particular level of R&D activities.

“There is little evidence that an intensity test will increase additionality and it may in fact do the opposite. In general, Australia is dominated by industries with relatively low levels of R&D intensity. The R&D Tax Incentive is crucial to encouraging firms in these industries to make small investments in R&D that may later lead to broader research programs.

“Often research units in large firms begin because one or two employees are able to convince management to take a small risk. These initiatives would be strangled by the introduction of an intensity test, and for most firms committing one per cent (of total expenditure) to an unproven research project is not feasible.

“We have spoken to a number of successful Australian businesses who would not be here today if not for the R&D Tax Incentive. They explain what the R&D Tax Incentive did for them and what it would mean if they couldn’t claim in the future.

Mr Fitzpatrick urged politicians to study a number of case studies, including QPay – An innovative payments platform provider for university students, SalesPreso – A technology platform transforming enterprise B2B sales by automating its single most time-consuming activity: creating customised presentations and TOTECS – A local business that offers SMEs affordable enterprise level integrated eCommerce websites.

Other case studies offered by the AIIA include ToukanLabs – An SME that provides innovative IT solutions in the health sector and FluroSat – An SME that provides predictive crop health diagnostics.

“There are more case studies enclosed and I’m sure, much more out there,” added Mr Fitzpatrick.  The AIIA’s submission on the R&D Tax Incentive review sets out these case studies in full, alongside additional evidence backing the AIIA’s stance.