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Aussie start-up organisations unite to respond to review of the R&D Tax Incentive

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Alex McCauley, CEO StartupAUS

An alliance of start-up organisations are calling for start-up friendly enhancements to the R&D Tax Incentive scheme.

The submission, prepared by StartupAUS and supported by FinTech Australia, StartupWA, StartupTas, TechSydney, Startup Adelaide and Startup Victoria, proposes a series of key recommendations to the Federal Government review that would see the scheme enhance its investment in innovative, high-growth businesses.

StartupAUS CEO Alex McCauley said the R&D Tax Incentive is most effective when directed to start-ups. National research conducted by StartupAUS in support of their submission found an overwhelming 98.7% of start-ups we surveyed indicated that they would hire additional staff with increased income from the R&D Tax Incentive, 82.4% of which would be specifically in an R&D capacity.

Why spend the R&D Tax Incentive on start-ups?

“When the R&D Tax Incentive is spent on start-ups, three critical goals are achieved. Start-ups are supported when they are at their most vulnerable, R&D output gets a big direct boost, and our fastest growing tech companies are encouraged to stay and create jobs in Australia. In short – you get a lot of bang for your buck when the R&D Tax Incentive goes to start-ups,” McCauley said.

CEO of Fintech Australia Danielle Szetho said, “The R&D Tax Incentive has already done so much to drive our fintech industry forward. The Federal Government now has a great opportunity to focus it where it’s desperately needed – on incentivising better collaboration between start-ups, corporates and researchers to drive much-needed commercialisation outcomes.”

Danielle Szetho
Danielle Szetho

CEO of TechSydney, Dean McEvoy said, “At a time where other global cities are investing more heavily in their start-ups and high growth technology sectors it would be a disaster if the government reduced its most effective supporting initiative.”

Dean McEvoy
Dean McEvoy

Managing Director of Startup Adelaide Jenny Vandyke said, “I believe that strengthening the R&D Tax Offset for our innovative, high growth start-ups is one of the best ways to stimulate jobs growth and strengthen our economy, particularly in the pressure cooker economic environment we’re facing here in South Australia.”

Jenny Vandyke
Jenny Vandyke

Director of StartupWA Justin Strharsky said, “The R&D Tax Incentive is one of the best levers we have to stimulate investment in innovation and encourage growing ventures to stay in Australia. We should increase its impact on early stage start-ups, especially by making payments quarterly, to drive job creation and make this a great place from which to build businesses.”

Justin Strharsky
Justin Strharsky

CEO of Startup Victoria Georgia Beattie, said, “The $2 million cash back cap will reduce available cash for start-ups in our economy. Increasing the cash available here will culturally change for the better the way Australians approach innovation. A focused increase towards small companies will be bait to attract smart innovators to put their minds towards Australia’s fundamental economic challenges.”

Georgia Beattie
Georgia Beattie

Mr McCauley also acknowledged how effective the scheme was in supporting early stage businesses. “Access to capital is the single biggest challenge facing early stage businesses, and the R&D Tax Incentive is one of the biggest levers available to government to provide support. Our research shows that 89 % of start-ups say R&D Tax Incentive is either critical (68.9 %) or very important (20.3 %) to their business, while 87.8% of start-ups say that receiving the R&D Tax Incentive quarterly rather than annually would make a ‘huge’ (77%) or very large (10.8%) difference.”

In August, the Department of Industry, Innovation and Science released figures showing net job creation comes from early-stage and start-up businesses –with young companies creating nearly all of the 1.6 million net new jobs in Australia from 2003 to 2014. These findings echoed figures released in the US, where economists have found that start-ups compose less than 10% of all firms, yet they contribute 20% of job creation at companies with more than one employee.

What exactly are they calling for?

StartupAUS has recommended a number of relatively low-cost amendments that could make a significant difference to the impact of the scheme on start-ups. These include:

1. Increase the amount paid to start-ups

Analysis conducted by StartupAUS and KPMG suggested even very substantial increases to the amount claimable by early stage tech start-ups (doubling it, from 45% to 90%) would only cost $90 million in a scheme that in total costs more than $3 billion each year. StartupAUS believes this part of the scheme delivers the most value, and suggests giving it a significant boost.

2. Pay it quarterly

Cashflow is the single biggest issue facing most start-ups. Some 87.8% of start-ups surveyed in support of this submission said that receiving the R&D Tax Incentive quarterly rather than annually would make a ‘huge’ (77%) or very large (10.8%) difference to the cashflow of the business. Many startups are currently borrowing against future R&D Tax Incentive payments, which can involve hefty interest rates and substantially eat into the effectiveness of the scheme. Paying the tax incentive quarterly to early stage startups would deliver a powerful boost to their viability and growth prospects.

3. Make it simple and transparent

The application process for the R&D Tax Incentive is cumbersome and lengthy. It costs founders time that could be used on their business, and often advisory fees to help put the application together. Simplifying the process would streamline applications and deliver more of the resources of the scheme to the right people (businesses, rather than middle-men).

4. Extend collaboration incentives to larger enterprises

The Expert Panel Report recently released by the Government proposed an additional incentive for collaboration with universities and research bodies when conducting R&D. Start-ups currently find it very difficult to access IP developed at universities, therefore StartupAUS welcomes any step to make this process more rewarding. Further to this, extending the collaboration entities to include larger enterprises could be a valuable factor in helping startups form strategic partnerships with corporates.

5. Don’t cap the low end

The Expert Panel Report suggested capping refunds to smaller companies under the scheme to $2 million. StartupAUS a cap of this amount cuts the refund available to many of many of Australia’s most promising scale-ups. If a cap is required, StartupAUS recommends a much higher number (around the $5 millionmark) would be more appropriate.

Mr McCauley continued: “The vast majority of Australian startups claim the R&D Tax Incentive. Startups, almost by definition, are working on innovative new products and services that require a bit of time and money to develop and get right, and many of those costs are eligible for refunds under the scheme. The capital provided under the incentive for early-stage and growing businesses is a lifeline to many startups that can literally make the difference between growth and failure for a promising venture,” he said.

The Federal Government’s public submission process is open until the 28th of October. If you’d like to make a submission, head to this website and follow the instructions. Feel free to take as much as you need from our submission, or tailor to your own views as appropriate. Alternately, you can fill out the government’s feedback survey here.

The state of start-ups in Australia

Data from StartupAUS’ survey conducted in October 2016 on a nationally representative sample of 74 start-ups:

An overwhelming 98.7% of startups said they would spend any increase they received in the R&D Tax Incentive on hiring additional staff. Of these, 82% said they would hire additional staff to conduct further R&D.

Currently, start-ups can access the 43.5% refundable tax offset, meaning they can claim a refund of 43.5 cents for each eligible dollar spent on qualifying R&D.

StartupAUS’ March submission estimated that, properly targeted, an increase in this figure from 45% (as it then was) to 90% would cost about $90 million. Given that overall spending on the R&D Tax Incentive is around $3 billion annually, this would be a very minor increase.

FinTech Australia research found 72% of fintech start-ups are looking to form partnerships with other banks, corporates and start-ups. However, 41% of these same start-ups also said they currently found it challenging to build partnerships with those same organisations.

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