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News & Analysis

Startup founders and the tech sector react to Budget 2020

- October 6, 2020 15 MIN READ
StartupAus CEO Alex McCauley. Photo: supplied

The delayed 2020 federal budget, delivered by Treasurer Josh Frydenberg in the wake of the damage wrought by Covid-19 contained a major unexpected win for the startup sector over the R&D Tax Incentive.

Amid a massive $213.7 billion deficit for this year – and $480.5 billion over the next four years, there were accelerated income tax cuts, and a $37 billion package for business, changes to the R&D tax incentive (RDTI), proposed to take effect from 1 July 2021, were a sign the government was listing to the sector.
The refundable tax offset will be set at 18.5% above the claimant company’s tax rate. For companies with group turnover of less than $20 million, tax expert Jack Qi, a director of accountancy and business advisory firm William Buck said the announcement results in the same level of RDTI as the current rules.

Qi did find some quirks in the government’s announcement.

“Interestingly, unless the Government introduces a cap on the RDTI rate, claimants who earn more than 80% of their assessable income from passive sources (interest, rent, dividends, royalties and net capital gains) will receive an increased RDTI compared to current rates. For those companies, the RDTI will be 48.5% (30% + 18.5%) of eligible R&D expenditure,” he said.

“The second key feature of this Budget is the removal of the proposed $4 million cap on RDTI refunds. This measure will only have application to businesses that are spending at least $9.2 million on eligible R&D expenditure in an income year.”

For companies with group turnover of at least $20 million, previously proposed, intensity thresholds will be introduced. Companies will be rewarded for increasing the intensity of their R&D spend. The RDTI will be equal to the company tax rate plus:

—     8.5% for R&D expenditure comprising up to 2% of total expenditure; and

—     16.5% for R&D expenditure exceeding 2% of total expenditure.

“Compared with current rules, this measure will be beneficial for claimants with high levels of R&D expenditure as a portion of total expenditure, whereas other businesses will see a reduction in the overall benefit of the R&D tax incentive,” he said.

Other startup specific measures in the budget, included $35.9m for the Boosting Female Founders Initiative over five years and $9.6 million for fintechs over four years.

Here’s what leaders in the tech sector and startup founders had to say about the 2020 federal budget:

Alex McCauley, CEO, StartupAUS

This is a critical time to be encouraging companies to invest in future growth. The R&D Tax Incentive does just that, so we strongly welcome the Treasurer’s announcement tonight that the scheme will get a $2 billion injection.

StartupAUS has been saying for a long time that if we want to invest in our future prosperity, we need a boost to R&D incentives.

The tech sector came together around that message in the lead-up to the Budget, and clearly the message landed. All of the cuts which we had opposed have been wound back, and small businesses have seen a boost to the headline rate of the incentive. It’s a huge win for the economy, and will help us rebound from the downturn much more effectively.

We’ve still got some work to do to make sure software claims are supported by the R&D Tax Incentive. Given the government clearly sees R&D as a significant driver of the recovery, we’ll be making the case for software R&D very strongly in the time between now and the next Budget in May next year.

Alison Hardacre, CEO and co-founder, Halaxy

Alison Hardacre

Business investment incentives
The write off for any asset purchased until June 22 will really help traditional businesses such as restaurants, clothing stores – bricks and mortar businesses.

As a software as service business, our main cost is not assets but salaries. So this may not be that helpful for high-growth ventures.

R&D

I thought the R&D tax incentives were interesting. Removing caps and increasing the percentage returned will not only invest in jobs now but jobs and Australia’s economic security in the future because intellectual horsepower drives new innovations.

Support for women

Increasing the number of co-founded grants to women-funded startups under the Boosting Female Founders Initiative (by $35.9 million over five years) is fantastic.

They had a pilot program this year and it was relatively small, but it recognises the market failure in that globally only 3% of founders of VC-backed businesses are female.

The needs of women are the needs of every other founder plus more and this recognises it.

Startups

$9.6 million investment over four years from 2020-21 to enhance support for Australian fintech startups to gain a foothold in international markets and to encourage foreign investment and job creation in Australia.

    • We help practitioners and patients navigate the complex health systems of the world,  including through directly managing patient appointment payments as well as rebates around the world. So we could benefit from it.

    • Fintech is traditionally country specific, just as is healthcare. This is “picking winners” – and it is a winner! But $9.2 million over four years is very, very small given the real costs of fintech – e.g. payments compliance, integrations etc all of which differ by country.

 

Ian Yip, CEO, Avertro

Ian Yip, co-founder and CEO of Avertro

It would be difficult to find a startup founder who isn’t supportive of the R&D tax incentive announcements in the budget. The government is sending a strong message of support for innovation and the startup community in particular. It helps justify our continued focus on R&D, and could result in an increase in effort allocated to innovation which helps strengthen our longer-term strategic initiatives.

One of my wish list items was for the budget to include support to hire and train entry-level technology employees. While I’m glad we received this in the form of the JobMaker hiring credit, the budget should have gone further. The age restriction to people 35 and under is not inclusive enough.

People of all ages were affected as a result of the pandemic, and I for one value the experience those over the age of 35 can bring to any role, even if it’s not in their area of expertise.

The additional restriction placed on individuals is also problematic; not every unemployed person qualifies for JobSeeker, Youth Allowance or Parenting Payment. There are others who voluntarily choose not to accept any form of government support, sometimes for cultural reasons. I once had a colleague who was not born in Australia tell me they would never accept a “government handout” because it went against all their cultural values.

The assumption that every single unemployed person looking for a job must by default be on a form of government support does not reflect the reality of the modern-day Australia we live in.

Finally, the practicalities of the hiring process in this instance are awkward. It is not always appropriate or relevant to the role when interviewing a candidate to ask if they are currently on one of the forms of government support in question.

How can employers actively seek out the people most in need of a job and covered by JobMaker? At this stage given the issues outlined, I suspect the JobMaker hiring credit may not be as useful as initially intended.

 

Greg Moshal, CEO, Prospa

On measures for small businesses: Small businesses are vital to the recovery of the Australian economy and also our local communities. We’re pleased to see the Government prioritising support through the significant business tax relief initiatives and investment incentives announced [yesterday]. These are exactly the kind of measures that will give confidence to small businesses to start planning, investing, and hiring for the future.

Our data shows small businesses are adapting to the new normal. Continued economic recovery will require support not just for well established, high credit quality businesses. Many small businesses continue to find it difficult to access funding, either because they don’t want to put their family home on the line or they need access to specialised products from more flexible smaller lenders. We encourage the Government to continue to consider a whole-of-finance approach to ensure good small businesses don’t fall through the cracks of the Government’s support schemes.

On R&D incentives: We welcome the Government’s decision to continue to support innovation in Australia by updating earlier plans to scrap research and development incentives and offering additional support. Today’s decision will further encourage Australia’s world class technology companies to innovate and grow and play a pivotal role in driving Australia’s economic recovery.

 We look forward to continuing our dialogue with Government to promote the role of software development as a key way to build world-leading fintech technology to support small businesses, and to position Australia as a global centre of fintech excellence.

 

Carl Hartmann, co-founder, Shortlyster

Carl Hartmann, co-founder, Shortlyster

While the JobMaker Hiring Credit and the $1.2bn investment to support apprenticeships and trainees are strong initiatives to boost employment, neither of these measures holistically address employment with thousands of Australian white collar workers looking for work who could be utilised more effectively now to help further stimulate the economy.

The JobMaker Hiring Credit will be paid at a rate too low to seriously help any business pay the wage of a skilled worker, of which there is high demand for amongst small to medium businesses and this ranges from everything from tech engineers, accountants, marketeers, IT and business professionals.

If the government helped subsidise for a period of time NEW full or part-time wages, we could get more people back into roles and keep significant intelligence within Australia. From our own data on the Australian National Talent Registry, we’ve seen hundreds of white collar skilled applicants per advertised role, reinforcing the fact that this is a group we need to be helping back into work not just tradespeople and manufacturing.

To get Australians back to work we need to get more creative in how we view people’s skill sets. The JobTrainer package announced earlier this year is a step in the right direction for helping upskill Australians, but we need more investment in the learning and development space for programs to help job seekers transfer their skills into new industries. Helping employers identify broader skill sets that can be applied to different roles. The job market is down, but the reality is that there are still a lot of businesses operating and are very active. When they are hiring, they need to be able to screen applications for transferable skill sets and make the right hires quickly.

It is positive to see reinforced support for mental health initiatives, but this focus needs to be on preventative measures that can help support the wellbeing of Australians before it reaches crisis level.

Everyone recognises that there are going to be many challenges to come for mental health support due to the knock-on effect of the pandemic and we need to address trigger points as early as possible. While support for organisations like Beyond Blue is necessary, we also need long term investment for mental health in the learning and development space to create initiatives that can be delivered at a workplace level to support the wellbeing and resilience of Australians as an ongoing priority.

Andrew Johnson, CEO, ACS

ACS is delighted to see the recognition of the importance of technology professionals in Australia’s recovery from the COVID-19 downturn with the emphasis on IT and cybersecurity in this year’s budget.

The 50,000 new higher education short courses which include IT subjects is an important part of addressing skill shortages across the Australian economy.

Coupled with this, the announcement of $240m to support female cadetships and apprenticeships in science, technology, engineering and mathematics will go some way to address the under-representation of women in the ICT sector.

Along with the measures announced in last week’s advanced manufacturing and Digital Business plans, the budget lays firm foundations for a tech led recovery.

 

Ron Gauci, CEO, Australian Information Industry Association

The Budget demonstrates that innovation and technology does play a vital role in Australia’s post COVID-19 economic recovery including the direct creation of tens of thousands of jobs. We welcome the focus on building jobs as well as skills, apprenticeships and training.

We believe it’s important to support women in STEM, so we welcome the expansion for the Women in STEM and Entrepreneurship (WISE) Grants Program as well as access to the Girls in STEM Toolkit, this will ensure we are working towards closing the skills gap.

We see this October 2020 budget as laying the ground work for further important measures
in the May 2021 budget to fully realise the Prime Minister’s ambition for Australia to become
a leading digital economy.

With the pending retirement of Minister Cormann and the reshuffle opportunity that his departure presents, we also call on the Government to create a Minister for Digital Capability to ensure that cross government digital initiatives critical to Australia’s future success are represented in Cabinet and to industry.

It is pleasing that the Morrison Government clearly understands that digital investments are critical to our economic recovery and sustainability through creation of employment and stimulus through spending on projects. We also strongly support government initiatives that continue to improve capability and productivity of government ICT systems that have demonstrated through COVID their criticality to Australia through business and citizen support.

 

Jack Qi, director, William Buck

On the R&D tax incentive: The Government has rightly backed away from cutting the R&D tax incentive for non-large claimants. Businesses thrive in an environment of stable policies – they need the confidence to make multi-year investment decisions.

We hope that other than tweaking the R&D tax incentive rules to more explicitly back software companies there will be no further changes to the incentive for at least the medium term.

 On other things the Budget didn’t address: There remains an urgent need to fix our employee share scheme tax rules.

The Government needs to help Australian startups by making tax concessions more accessible for all employees who cannot sell their shares or options on a liquid market.

Currently, the unfortunate minority who do not qualify for the Startup Concession are still left with unworkable tax rules originally designed for executives of ASX-listed companies.

Sam Pratt, CEO, Render

This is an extraordinary budget for an extraordinary time. There are plenty of ideas in here that none of us saw coming and yet, will have a substantial impact on swaying business decisions in favour of investing in Australia.

The first in the government’s wage incentives for those under 35. With working remotely now the norm, this group is at risk of having their graduate jobs outsourced overseas. This is enough of an incentive to steer those decisions back towards employing young Australians.

Beyond this, the increased R&D tax incentive will be huge for Australian technology businesses.

The $2bn R&D tax incentive lift equates to a 20 per cent increase from its level in 2018-19, and its broadening presents a compelling incentive to maintain and expand product, technology and engineering teams in Australia, as opposed to redirecting those capability investments elsewhere.

I don’t think we can underestimate just how impactful the instant asset write-off provisions are either — every investment decision in Australia is now 30 per cent more compelling. It reinforces and further justifies our business case to keep the heart of our operations here in Australia, despite seeing substantial growth in the US.

Rebecca Schot-Guppy, CEO, Fintech Australia

FinTech Aus MD Rebecca Schot-Guppy. Photo: supplied

This is an incredibly positive budget for the fintech and innovation sector.

The Digital Business Plan ticks most of our wishlist and pulls all the right levers to help bolster the fintech industry. It includes support for the CDR rollout, helping fintechs expand into overseas markets, a review into the payments landscape and investing in a digital business register, and e-invoicing measures.

Perhaps the biggest surprise is the government’s reversal of its stance towards the R&D tax incentive.

The policy is important for fintechs capital run way particularly at their earlier stages  and the changes will no doubt support their growth. In addition, the increased R&D spend will ensure that new innovative businesses come into our economy which will help lead our recovery.

Our only concern is that the reform comes into effect on July 1, 2021. For us to have the best chance of supporting the sector through this pandemic, its needs to be introduced now.

Finally, we applaud the government’s fresh measures to encourage the employment and training of women in STEM. Women continue to be underrepresented in fintech.

Up until now, this has been left to the market to fix, and as a result progress has been slow. We’re hoping this measure towards diversity will have substantial social and commercial outcomes both for the fintech industry and for Australia.

Des Hang, co-founder and CEO, Carbar

Des Hang

This is a budget aimed at increasing household income and by in part stimulating spending. As more consumers start to realise the benefits of car subscription over ownership, we can only see this trend further bolstering our business, and many other consumer-facing tech companies in Australia.

 We do however, question the logic of the instant asset write-off. Australia is a nation that’s well accustomed to the subscription business model. This write-off encourages ownership over other unique ways of accessing assets.

It’s a blunt instrument that will have the intended effect of stimulating spending, but we wonder whether there was a more nuanced, tech-savvy way in which this could have been implemented.

Finally, we welcome the expansion and changes to the R&D tax incentive regime.

The auto sector is rapidly digitising and this program will only help support its disruption and change. We firmly believe this change is for the better, and while it may be uncomfortable immediately, like most innovations it will lead to more jobs and stronger companies in the medium to long term.

 

Tim Dickinson, CEO, Assembly Payments

Tim Dickinson, GM of Platform at Assembly Payments.

It’s great to see the government adopting a growth mindset for supporting businesses and pushing for greater access to our financial system.

We need to make sure however that we don’t undermine the strong foundation we have as a world leader in banking and financial services, especially at a time when a lot of people are vulnerable.

Advancements in the fintech sector through greater access to public digital infrastructure like the NPP and CDR are a great move, and combined with better R&D incentives, it seems the government really does support the view that we need to innovate our way out of this. That’s fantastic news.

Tax support for businesses and other incentives for hiring are also good, as they’re also critical to help businesses sustain growth – especially sectors of the economy that are high growth and will benefit from R&D incentives too.

We look forward to further policy details, and also hope to see some of this funding facilitate initiatives that encourage banks, fintechs and other interested institutions to collaborate and jointly leverage the potential of the NPP and CDR.

Brodie Haupt, CEO & co-founder, WLTH

Finally, a commonsense approach to the federal government’s innovation mandate has landed in the 2020 budget.
With the aim to make Australia a digitally-led tech powerhouse, this scaled-back version to the initial proposed changes is a welcome relief to the technology sector.
Major players are still heavily reliant on legacy systems. The banking and payment technology sectors in particular need to be nurtured and encouraged through government support for incumbent startups to succeed in revolutionising various tech-based solutions.
The R&D Tax Incentive (RDTI) scheme is one of the major reasons Australia has been so attractive for startups and larger tech companies alike, with the most important factor being that it has enabled and incentivised companies to base themselves, and grow on home soil.
This was the time for the government to show support through action, and not just talk about a mandate. While it’s not been an increased mechanism, the changes will no doubt be welcomed by many companies.”

Mark Sinclair, ANZ Regional Director, WatchGuard Technologies

I welcome the government’s initiative to invest in helping businesses go digital.  However, more digital connectivity increases the likelihood of cyberattacks.

This budget announcement with its instant asset write-off will help Australian businesses cope with the financial burden of increased cyber security.  It will also support Australian companies and businesses obtain the technology and awareness training required for effective mitigation of modern cyber threats.

In turn, this will also help drive more jobs in the local cyber security industry and is a recipe that the Morrison government should consider for future stimulus packages.

 

David Rennex, CEO & co-founder, DebtForce

It’s no secret that the COVID-19 pandemic caught Australian businesses by surprise in 2020. But, in an otherwise challenging year, the 2020/21 federal budget has provided some comfort for businesses trying to navigate their way through the significant economic impacts suffered.

Research and development, a major area of focus and expenditure particularly in the startup tech world, is key to adapting to the fast-moving digital age.

For small businesses, the removal of the $4 million cap on annual cash refunds, will re-instil confidence to allocate crucial capital expenditure to R&D investment. The timing of these changes is also pertinent, with the changes to take effect from July 2021, a time where the true economic impact of COVID-19 will be known.

 

Ben Thompson, CEO & co-founder, Employment Hero

Ben Thompson

The $4.3 million pledged to Beyond Blue’s New Access Service and the extension is a welcome relief to small business owners.

The funding enables business owners to take care of themselves – something that’s hugely important given the tough circumstances SME owners have faced in 2020. I’ve always said that when leaders can be the best version of themselves at work, they give the most to their people, and mental health plays a vital role in that.

As a proud working parent of three children, I know that it’s not always easy to juggle work and home life; with that said, I was disappointed at the lack of childcare support. Not everyone can afford the luxury of having a primary carer at home. Working parents need the opportunity to get back into the workforce, and with the JobMaker scheme targeting below 35’s, we’re missing a huge population of parents that have mouths to feed.

The instant asset write-off is a great incentive for small business owners to plan for big purchases they might not have otherwise been able to make for the next few years. It will cut red-tape and increase speed-to-market for many startups and growing small and medium businesses.

The budget includes an $800 million pledge to help businesses take advantage of digital technology. This is great; incentivising businesses to become digital is not only a great way to stimulate local technology sector growth – it enables Australian SMBs to compete in the global arena if they wish. I would have liked to see more funding directed towards helping businesses become more compliant with digital tools.

This year has seen the largest and fastest digital innovation period in recent history. While $400 million is going towards a national directory, we need more clarification and certainty around how the other half will be spent to take advantage of digital transformation opportunities now.

There should be more certainty around how businesses can digitally transition, especially for some legacy small business owners who have run their operations manually for so many years.

 

Mark Perry, CTO Asia Pacific, Ping Identity

Ping Identity is supportive of the Digital Business Plan announced by the Morrison Government on September 29. In particular, the funding to support the rollout of the Consumer Data Right (CDR) to banking and energy is welcomed.

We anticipate this will assist in streamlining the onboarding process for data recipients, which is currently limiting the expansion of the programme.

It is also hoped that this will fund the release of a complete testing suite to solution vendors, to provide Data Holders and Data Recipients with confidence as they make important technology decisions for CDR compliance.

 

 Vijay Sundaram, Chief Strategy Officer, Zoho

Vijay Sundaram, chief startegy officer, Zoho

The $2bn R&D tax incentives: Zoho welcomes the Australian Government’s recognition of the importance of R&D. Overcoming the medium- to long-term effects of the pandemic will be dependent on creating an environment in which innovation is pursued and entrepreneurialism is rewarded.

Research and development is an essential foundation of this environment, and by incentivising businesses – big and small, new and established – we can build the tools, processes and culture upon which Australia can build its recovery.

Additional funding for cyber security: Stimulated by the pandemic, a decade of digital transformation occurred almost overnight in Australia. But as our dependence on technology grows, so too do the cyber security threats we face.
As the value of our personal data increases, both the prevalence and severity of cyber attacks are growing, with the financial and reputational damage caused posing existential threats to businesses of all sizes. Therefore, the Government’s increased commitment to – and funding of – its cyber security strategy is an important step in safeguarding and empowering Australian individuals and businesses online.
Digital transformation isn’t a temporary trend but a permanent shift, and if we can’t trust our online security, we can’t truly embrace our digital future.