Now that the dust is starting settle around what is one of the most closely-followed Federal Budgets in recent memory, some key themes are starting to emerge as invariably the different sectors of the Australian economy fall into either the “Winners” or “Losers” camps.
For the Australian tech sector, this Budget was a missed opportunity – a solid “B minus” where no major backwards step was taken, but then no great leap forward either.
This mere lack of significant progress is enough for many of us to throw our arms up in dismay – but what should we do next?
The answer, for a resilient community that is used to the ups and downs of a life in tech, is of course making the best of the situation.
So here’s our take on the value of the various Budget measures from a practical standpoint and how startups and scaleups can optimise their outcomes until next time Budget-frenzy comes around.
Just how impactful are the measures?
The below is a snapshot of some (but not all) of the tech-specific measures announced in the Budget and our take on their level of relevance and effectiveness for Australian tech.
Patent box for Australian medical and biotech patents – this measure is ultimately about catching up to overseas patent boxes so that Australia remains internationally competitive in attracting R&D activity in these fields.
However, given that the appeal of this measure is a lower tax rate on profits, this is of little relevance to the loss-making and earlier stage medtechs and biotechs who are most in need of support.
Emissions reduction incentives – valued at $1.6b over 10 years to incentivise private investment in certain emissions reduction technology, this is a major opportunity for Australian cleantech companies who need to be working closely with technology investment agencies like ARENA, CEFC and CER to maximise this opportunity.
Artificial intelligence – valued at over $100m over the coming several years, the incentives are very specific and many AI-driven startups won’t be eligible. Give this a go – but don’t be too surprised if these incentives don’t work for your startup.
Digital adoption incentives under the $1.2b digital economy strategy – these incentives represent the Government’s push to build our digital infrastructure, digital skills and technology usage amongst SME businesses.
Whilst not specifically targeting the tech sector, we could be indirect beneficiaries as Government procurement contracts become available and non-tech businesses are encouraged to sign up Australian tech offerings. Startups should try to get a piece of this significant Government spending.
Women’s programmes – there are no significant programs in the Budget that was not already announced previously, so more could be done to address the gender imbalance in Australian tech.
Tax offset for games developers – a 30% refundable tax offset has a high degree of appeal for those eligible and will incentivise the local digital games development industry.
However this is only available from 1 July 2022, after industry consultations and detail rules are written. For those able to access this incentive, it is a no-brainer.
Instant asset write-off and self-assessment of depreciation rates of intangible assets – given that tech companies tend to be labour-intensive as opposed to capital-intensive, these measures offer limited value.
Unaddressed Challenges – and what to do about them
If we look at what are the things that could really move the dial for the tech sector, there are a number of recurring themes and all of them went unanswered in this Budget. Here are some of the key ones and what Australian tech can do about them until such time as a more permanent solution has been found.
Making R&D tax incentive more friendly to agile software development – there is an increasing chorus of calls for the R&D incentive rules to be updated to recognise that the R&D process for agile software development can be very different to “traditional” R&D in a laboratory-type setting.
It’s been a couple of years since the nadir of the media headlines about tech companies being asked to repay the R&D tax incentive they received. Whilst anecdotally the AusIndustry and Tax Office are approaching software R&D in a more understanding manner, the fact remains that the black letter of the law was drafted with traditional R&D in mind and can often be challenging for agile software companies to satisfy.
Until a software-specific R&D tax incentive regime is introduced (if it ever happens), startups and scaleups must treat the existing requirements seriously, invest the time needed to record their activities on a real-time basis to demonstrate compliance with existing rules, and be disciplined about self-assessing what is eligible R&D and what isn’t.
Quarterly R&D incentive refunds – this is a measure which in theory doesn’t cost the Government much money and should be implemented to meaningfully help the cashflow of tech companies.
However, no cigar. For now, companies need to go without or consider borrowing from R&D tax incentive lenders.
Employee share scheme tax rules – it is no exaggeration to say Australia is one of the least competitive jurisdictions in its treatment of taxation of employee shares and options. Whilst this Budget removed cessation of employment as one of the deferred taxing points, based on our experience setting up employee share/options schemes this is merely a minor tweak.
It is still possible for someone who isn’t eligible for the Startup Concession to get taxed before they can practically sell the shares or options.
This pain point is very much still with us and our advice to tech companies is to instil best practice – i.e. plan ahead, action promises made to employees as soon as possible before rising company valuations force you into a corner, and obtain good tax advice early in order to plan for a good outcome.
Skilled migration visa requirements – the Government has a genuine excuse for this one thanks to COVID, but once the borders open up, the acute shortage of tech talent need to be addressed.
For now, we suggest tech companies to really go the extra mile to incentivise their existing talent and explore some nascent remote recruitment and staff engagement technologies that are starting to come online that could massively increase the talent pool.