The Australian Information Industry Association (AIIA) is acting on significant concern from member companies across the Australian Information Communication and Technology (ICT) Industry in response to the proposed changes to the R&D Tax concession scheme.

“The ICT industry believes this Bill contradicts the stated goals of Government for the future of Australia’s digital economy, jeopardises the return on investment being made in broadband infrastructure and sends the wrong message to innovators in every sector of industry,” said AIIA CEO Ian Birks said.

“Innovative software development will be essential to the creation of a vibrant digital economy; the proposed R&D tax amendments threaten the fundamental contribution that the ICT industry stands to deliver the Australian business community,” Mr Birks said.

AIIA and a number of AIIA members made comprehensive submissions to Treasury opposing these changes prior to the release of the draft legislation on 18 December 2009, which fails to address concerns raised by the overwhelming majority of stakeholders.

The Association is now speaking with Treasury and a number of senior Ministers, as well as coordinating a membership lobbying campaign and convening an industry panel discussion in Sydney on 1 February to assess the next steps.
The proposed changes, contained in the Tax Laws Amendment (Research and Development) Bill 2010, will affect the ICT industry in a number of key areas.

The Bill contains revised definitions of R&D eligibility that add complexity, uncertainty and a heightened compliance burden that will particularly impact small business – traditionally leaders in the ICT innovation field. The revised definitions are at odds with standard definitions applied by the OECD and each of our major trading partners.

A broader list of excluded R&D activities is also proposed that will apply to all activities regardless of their ability to meet the revised definitions. And software development will be hit because of the significant extension of the ‘multiple sale’ requirement.

While there are certainly positives in the Bill – that may ultimately provide more cash to companies successfully meeting the requirements of the legislation – AIIA members believe that on balance these amendments fail to address the fundamental drivers of meaningful and effective commercial R&D in Australian business.

“The Bill explicitly aims to ‘encourage industry to conduct R&D activity that might not otherwise be conducted’. Our members feel that this fails to account for the commercial realities of R&D investment across the ICT industry,” Mr Birks concluded.

“These amendments will potentially degrade both the level and quality of Australian technology innovation across the board, which already suffers in comparison to many major trading partners,” continued Mr Birks.

“They must be revised if the Government is serious about establishing a genuine digital economy in which Australian business is able to leverage the huge benefits offered by intelligent technology.”

Additional background:

The flow-on benefits of technology innovation have been widely recognised for many years, with the former Department of Communication, Information Technology and the Arts reporting it to be the leading driver of long-term productivity growth in 2006.

In particular, AIIA members believe the Tax Laws Amendment (Research and Development) Bill 2010 threatens this contribution by:

• requiring compliance with a new dual test demanding novelty and high levels of technical risk, an approach which has been rejected in most other global jurisdictions
• requiring claimants to now determine whether their R&D activities pass four interlocking threshold tests, adding considerable administrative burdens already struggling small businesses
• requiring claimants to distinguish between core and supporting R&D activities according to new test criteria
• specifically excluding software services (other than software development) from legitimate R&D activity.