R&D tax incentives & the tech sector
The Interim Report emphasises the importance of the R&D Incentive for many tech companies operating in Australia. In its evidence to the Committee, StartupAUS highlighted that it is the “single biggest government program supporting start-ups in Australia”, with around two thirds of all R&D grant support being made directly to companies below $20 million in turnover.
Despite its importance, the Committee heard that accessing R&D Incentives is hampered by legislative ambiguity and general complexity. This makes it unclear whether eligibility under section 355-25 of the Income Tax Assessment Act 1997 (Cth) is intended for software development focused more on commercialisation and market-driven innovation than traditional scientific testing.
Other evidence highlighted complexities to the respective roles of AusIndustry and the Australian Taxation Office (ATO). Successfully registering R&D activities with AusIndustry and receiving grants does not necessarily prevent the ATO later challenging eligibility, potentially triggering claw backs of grants and making businesses’ cash flows uncertain.
Finally, the level of complexity and compliance requirements under the rules often require external advisers to navigate requirements spread across multiple statutory instruments.
The Interim Report recommended (i) that further clarity be introduced surrounding the eligibility of software development for R&D concessions; and (ii) that clearer guidelines and certainty be introduced surrounding reviews that may result in claw-backs of grants already paid to companies.
Given the impacts of COVID-19, the Committee also considered proposals such as increasing the rate of R&D incentives, introducing a pool for R&D claims for larger organisations, and increasing the frequency of R&D payments (which are typically annual). Whilst these were not incorporated into the Recommendations, proposed legislation may effect some of these changes: increasing the eligibility threshold, and making several other threshold changes for lower-turnover claimants.
Several companies highlighted the compliance challenges associated with the disparate payroll tax frameworks across Australian States. Companies with a more mobile, remote workforce (i.e. many tech sector businesses) may hire a single employee in a new State, but doing so can significantly increase payroll tax compliance in order to comply with that State’s payroll tax regime. Proposals were explored to leverage centralised technologies to streamline State-based compliance, and for greater national alignment with reporting requirements, and the Interim Report recommends that States undertake a simplification process.
Tax treatment of Employee Share Schemes
The Committee received significant evidence highlighting the importance of equity payments for employees of start-up companies through ESS. This is common practice in the sector, and an important way to align employee incentives with company growth and performance, and provide competitive remuneration whilst managing cash flows.
Start-ups gave evidence that issues arose where their share-based payment schemes were taxed as employment income, because this tax treatment poorly reflects the investment risk and uncertainty associated with taking shares in an unlisted company rather than cash payments. Changes were introduced in 2015 to address some key issues for ESS in start-up businesses, but include turnover thresholds. Some argued that these thresholds ought to increase to cover later-stage start-ups facing similar issues.
Whilst noting the underlying issues, the Interim Report does not make any specific recommendations on ESS, and notes that Treasury is currently performing its own review of the ESS rules. Tax Partner, Shaun Cartoon, gave evidence before the Standing Committee on Tax and Revenue at its hearings on 19 June 2020 and argued strongly for further tax and regulatory reforms to enhance the operation of employee share schemes in Australia. A transcript of the hearings is recorded in Hansard and is available to read here.
Tax treatment of ICOs/Blockchain capital raising
Many companies which leverage blockchain technology in their businesses have used blockchain platforms to introduce unique cryptocurrency tokens as a mechanism for alternative capital raising. Australia’s tax system potentially taxes the up-front receipt of ICO proceeds as income from the sale of cryptocurrency tokens. This can significantly undermine the attractiveness of ICOs, by effectively reducing the net capital raise by the prevailing corporate tax rate (which the Interim Report notes is relatively high by international standards). Other jurisdictions have amended their tax regimes to defer the payment of tax on ICO proceeds to a later date (typically associated with the monetisation of the platform that the ICO receipts fund).
This is a vexed issue in Australian income tax law, and the Interim Report recommended that Treasury (which is currently considering the area) release its Report on the issue, which would at least clarify current positions.
The Interim Report focuses its recommendations on “quick wins”, and canvasses areas for more significant structural reform, without making concrete recommendations on these more complex issues. This is understandable as an Interim Report, particularly where issues raised overlap with existing reviews (for instance, R&D tax changes, and Treasury’s ESS, and ICOs reviews).
By the time the Committee tables its final report (expected in April 2021), the outcome of these ongoing processes ought to be known, and the Committee should be in a strong position to make more substantial recommendations, but the Interim Report gives a strong insight into how these recommendations are likely to look, and how future tax changes may improve Australia’s start-up landscape.
This article was written by Shaun Cartoon, Partner and Joel Emery, Associate.