This article was originally published in Startup Daily
The Strategic Examination of Research and Development (SERD) by an independent panel chaired by Tesla chair Robyn Denholm has released its long-awaited final report titled “Ambitious Australia – Strategic Examination of Research and Development”. The examination was undertaken in a backdrop of Australia as a nation falling behind on its R&D and innovation outcomes against other OECD countries, with the key objective of the examination being a major boost to the quantity and quality of R&D activities being undertaken in Australia.
“Ambitious” is the right word to describe the combined set of 20 recommendations of the report. These recommendations span an unprecedented breadth, which if implemented by the Government (at least in a substantial part) will have a profound impact on the direction of the Australian innovation and startup ecosystem.
However, the ambition of the report will be kept in-check by a set of political, budgetary and practical realities. Below is our analysis of the key recommendations, with a focus on government funding for Australian startups and scaleups. We will not cover every recommendation from the report, rather, we ask the key questions “Will there be more government funding for startups and scaleups?” and “What are the practical and commercial hurdles that need to be overcome?”
Recommendations that impact on government funding for tech companies
Recommendation 1a: Commonwealth Cabinet establish a single National Innovation Council (for example by reforming Industry Innovation and Science Australia (DIISR)) chaired by an eminent Australian, supported by a Statutory Officer, to oversee Commonwealth R&D and innovation funding and reporting directly to the Prime Minister and the Minister for Industry and Innovation / Science.
Our take: This should be a worthwhile reform that places an emphasis on the R&D tax incentive (RDTI) at DIISR and facilitate a pro-startup and innovation culture there, which should in turn result in better outcomes for startups when they claim the R&D tax incentive.
Recommendation 1b: Consolidate national R&D and innovation efforts into 6 National Innovation Pillars.
Our take: This is the first time “Technology” as a sector is granted its own real estate alongside “traditional” national focus areas of health, agriculture, defence, energy and resources. This is an exciting development for Australian startups and scaleups and should lead to better policy and administrative outcomes in general for the sector.
Recommendation 2a: Protect and support foundational research by reversing the decline in competitive grants, building investment in the main competitive grant schemes to globally competitive funding levels, and applying appropriate indexation.
Our take: This is an exciting prospect in a backdrop of falling government investment in competitive grants targeted at innovative technologies. However, given the Government is under immense pressure to reduce its Budget deficit, it remains to be seen to what extent this recommendation will be adopted.
Recommendation 5a: simplify the R&D tax incentive and focus the scheme for greater impact by:
- Introducing a deemed rate for Supporting R&D activity expenditure, measured as a ratio to Core R&D expenditure
- Raising minimum R&D project expenditure from $20,000 to $150,000
- Removing clawback rules in the R&D tax incentive so that claimants do not need to repay RDTI they receive
Our take:
- Calculating Supporting activity expenditure was never a major pain point in the RDTI claim process.
- Increasing the minimum eligible R&D expenditure will cause early stage companies to miss out.
- Whilst giving claimants certainty around their RDTI is positive, we cannot see a world in which there is no compliance activity being conducted by the ATO. What would make sense is a shortened review period for R&D claims (currently 4 years from lodgement of the tax return).
Recommendation 5b: creation of a “premium startup stream” for the R&D tax incentive which will involve:
- Giving a 5% higher R&D tax incentive rate for startups and high growth companies that qualify for a 100-point style test. Points will be awarded for securing VC investment, participating in an accelerator, holding IP rights (presumably patents) and collaborating with universities.
- Advanced payments of RDTI on a quarterly basis, “based on quarterly Business Activity Statements”
- A new calculation methodology to allow for additional types of expenses to be eligible for RDTI, including “deployment”, “early commercialisation”, “user testing” and “adoption research”
- Eligibility for this stream is limited to 3 years, with the potential to extend for a further 3 years for “deep techs”
Our take: This would be a powerful boost to Australian startups. However, significant hurdles arise in implementing these ideas. A myriad of complex definitions will need to be added to tax law and this could be watered down or thrown in the “too hard” basket altogether by the Government. Should it be implemented, we expect significant technical ambiguity in the qualification criteria, making it critical that startups work closely with their accountants and advisors to get the best outcome they are legitimately entitled to.
Recommendation 5c: creation of an “SME and scaleup stream” of the R&D tax incentive which will involve:
- After claiming RDTI for the first 3 years, continued eligibility will depend on achieving revenue growth at least 5% above Consumer Price Index (CPI)
- The $20m revenue cap for refundable RDTI will be lifted to $50m
Our take: This is a mix of good and bad news. Overall, it is a positive for Australian scaleups provided they can demonstrate sufficient revenue growth. Once again, things will get technical – interpretation of accounting and tax definitions will have a major impact on a company’s bottom line.
Recommendation 5d: overhaul the R&D tax incentive rules applicable to corporates and multinationals by, amongst other things:
- Removing the $150 million R&D expenditure cap
- Removing the tiered R&D intensity measure and bringing the rate for large companies in line with that currently provided for SMEs
- Removing the RDTI offset from franking credit calculations.
Our take: This recommendation will have minimal application to startups and scaleups. It would also have a material expenditure impact for a Government that is looking for budgetary savings. We have doubts it will be implemented.
Where to from here
The last set of meaningful legislative reform for the tech sector came under the Turnbull Government with its introduction of the Startup Concession for ESS and the Early Stage Innovation Company tax incentives for investors. More than 10 years later, the world is a different place and the Strategic Examination of Research and Development is an excellent opportunity for all levels of Government to steer the future of Australian innovation.
However, significant implementation and budgetary hurdles remain. From here, the key thing to watch is the upcoming Federal Budget for 2026-2027 and the resulting public consultation process for legislative change.
