Tech companies call on government to reverse $2bn in planned R&D cuts to spur investment

Australia’s biggest tech companies want to catapult the country from its sharpest economic downturn since the great depression.

Co-Founder and CO-CEO of Atlassian, Mike Cannon-Brookes. Picture: AAP

The nation’s biggest tech companies led by Atlassian, Canva and Airwallex have appealed directly to Scott Morrison to reverse a proposed $2bn cut to research and development incentives and called on software development to be added to the tax break.

The 14 companies, collectively valued at $80bn, say dumping the “cost-cutting” measures, which were developed before the COVID-19 pandemic, will be key to stimulating investment and unpinning structural changes to the economy as it battles its sharpest downturn since the Great ­Depression.

“While these unprecedented times present many challenges for the tech sector, as global economies and corporate spending contract, we firmly believe that with appropriate support and incentives, this sector will be key to a strong and enduring Australian economic recovery, driven by innovation and technology in all its guises,” the companies wrote in a letter to the Prime Minister seen by The Australian.

“In fact, we view the current crisis as a ripe opportunity for Australia to redouble investment in a digital economy and its future prosperity.”

The government has been criticised for proposing to implement the legislation retrospectively from July 1 last year, which the opposition says will result in almost $2bn in research and development tax incentives (RDTI) being clawed back, while adding further uncertainty around business investment.

But Josh Frydenberg said the changes would ensure the program was better targeted and would improve its integrity and sustainability.

“The government is committed to backing R&D in Australia and the economic opportunities and jobs it creates,” the Treasurer told parliament in December during the bill’s second reading.

“In 2019-20 the government’s total support for R&D is estimated to be around $9.6bn. This includes almost $400m for our Medical Research Future Fund and record funding of over $860m for Australia’s national science agency, the CSIRO.

“(The) reforms … will ensure that the tax incentive remains an effective and sustainable part of Australia’s overall support for R&D.”

But the tech companies warn that the retrospective start date, which Mr Frydenberg said was deferred by 12 months, could deter business investment and job ­creation at a time when more than 1 million Australians are out of work.

They said Australia’s support for R&D was already lagging behind peer OECD nations and further reducing that support could drive companies offshore to more attractive locations such as Silicon Valley in the US.

“While we appreciate that the bill was born in a different time to achieve different objectives, we strongly oppose it today not only for what it contains but for what it is lacking — measures to actively support and stimulate R&D ­activity in Australia at a critical juncture as the innovation and tech sector seeks to recover from the global impacts of COVID,” they said in their letter to Mr ­Morrison.

“Now is not the time to reduce the level of government support for R&D in Australia, which ­already lags behind peer OECD ­nations in this respect. Rather, the existing RDTI mechanism is an ideal vehicle by which to deliver much needed stimulus directly to the innovation economy.”

The companies were particularly concerned that the changes would stifle smaller businesses, which are struggling to survive during the pandemic, let alone consider hiring more employees.

Impacts on smaller companies

“Our specific concerns with the bill’s cost-cutting provisions include the impacts on smaller companies of the effective reduction in their tax offset rate, as a result of linking the tax offset rates to corporate tax rates, and the imposition of a new cap on refundable amounts, at a time when many SMEs are struggling to survive and retain staff.

“We also remain concerned that the bill fails to address the ­issues raised by the tech industry around ensuring that software development qualifies under the program.”

They called on the government to commit to a “a moratorium on RDTI clawbacks”; paying early refunds in advance of the tax cycle; and providing a one-time stimulus to eligible small entities via the R&D program. In the medium term, they called for the program to include software development activities and increasing support available via the R&D program to become more competitive with peer OECD countries.

Atlassian co-founder and co-chief executive Scott Farquhar said the tech industry was well placed to support a post-coronavirus recovery, if the government got its policy settings right.

“Cutting R&D makes no sense, especially while the government is looking for ways to ­rebuild our economy,” Mr Farquhar said.

“The technology industry is a fast-track to Australia’s post-pandemic recovery. It’s a massive force multiplier for jobs and already makes up 6 per cent of our GDP, a number which could be much higher. Doubling down on our investment in innovation now will reward our nation 10-fold into the future.”

Meanwhile, Canva chief fin­ancial officer Damien Singh said research and development was fundamental to furthering Australian innovation.

“We should be actively encouraging this critical investment in our future, particularly as the economy emerges from the COVID-19 crisis,” Mr Singh said.

Seize this opportunity

Prospa co-founder and chief revenue officer Beau Bertoli said some of the world’s leading tech companies emerged from the global financial crisis 12 years ago, which underlined the need for the government to “seize this opportunity”, not cut costs.

“Australian fintechs and small businesses have been challenged during this COVID-19 crisis to innovate and find a better way to do things,” Mr Bertoli said.

“We urge the government to seize this opportunity and incentivise further innovation in Australia, allowing us to come out of the global pandemic stronger than ever.”

Last week the Senate select committee on financial technology and regulatory technology recommended the government to set “clear limitations” on the tax office’s ability to claw back retrospective R&D incentive payments.

The committee also recommended the government “provide further clarity “around eligibility for the incentive program to “ensure genuine software creation by Australian start-ups is reliably supported”.

Earlier this week Dow Chemical chief executive Andrew Liveris, who is now serving as a special adviser to the government’s National COVID-19 Co-ordination Commission, said Australia needed to expand its definition of “manufacturing” to include digital services, and focus its efforts on technology-rich sectors where the nation could compete on capability rather than price.

Opposition employment and industry spokesman Brendan O’Connor said research and development was “inextricably linked to a recovery led by advanced manufacturing” and called on the government to ­reconsider its changes to the R&D incentive program.

“In the midst of a recession, now is the worst time for the government’s long held plan to cut almost $2bn from the Research and Development Tax Incentive,” Mr O’Connor said.

“The government’s planned changes will reduce Australia’s attractiveness as a place to conduct research, which is inextricably linked to a recovery led by advanced manufacturing, and will slow economic recovery, costing Australian jobs.”