Principles for an innovative software development tax incentive

The need for new measures that encourage investment in innovation is vital as the Australian economy looks to recover from COVID-19. While we have weathered the health crisis well, border closures mean limited access to overseas talent, increasing the cost of labour and limiting the ability for some businesses to pursue innovation agendas and invest in growth.

Further, as the world opens at a faster trajectory than Australia, we will be competing with our international peers to secure footloose investment. What can be done?

One area which plays to Australia’s strength as a service-focused economy is incentivising software-specific innovation. This is why KPMG was pleased that the Senate Select Committee on Australia as a Technology and Financial Centre has recommended the Federal Government considers the establishment of a Software Development Tax Incentive (SDTI). This would be separate from the long-standing Research & Development Tax Incentive (RDTI).

A start has already been made in the recent Federal Budget with the introduction of the Digital Games Tax Offset. Our hope is that this measure could be the first step in the development of an SDTI framework to incentivise innovation in software that doesn’t currently meet the eligibility criteria set out in the RDTI program.

Why is it needed? As the Industry Innovation and Science Australia (IISA) reported last year, close to 50 percent  of innovation in Australia is non-R&D based and many initiatives are from digital innovation. Simply, there are other types of innovation which do not require R&D but have the same potential, and in some cases more, to benefit both the business developing the innovation and the broader economy

IISA gives many examples of this, including novel hardware and software solutions which use existing technologies to develop previously untapped markets, combine and integrate platforms and technologies for innovative applications.

Another key issue is the creation and use of datasets that are required to test and unlock new product offerings. This problem was also highlighted in the recently published Kalifa Review of UK FinTech with a recommendation that the UK R&D tax credit program should be expanded to accommodate the cost of financial data sets.

In KPMG’s submission to the senate Committee, we identified that in the context of FinTech and RegTech, there are many innovative solutions being developed that do not currently qualify for the RDTI due to the interpretation of software-based R&D activities. There are also more common examples of innovative software solutions that the regulator, AusIndustry, has assessed as having no levels of R&D but where the product later went on to be shown to be highly innovative and led to significant ongoing investment in, and revenue for, Australia.

Having access to incentives at the early stages of software development for start-ups could accelerate investment and provide much needed capital to grow the business. In addition to establishing an SDTI, we support a collaboration premium which would reward companies for collaborating with each other and with research institutions could be developed to further incentivise innovation.

KPMG has just issued a paper which sets out seven key principles that would form the framework of an SDTI. These include eligibility being based on the outcome or the intended outcome of the development activity, rather than the process. That is, the primary test is the product and whether it is innovative and a driver of future jobs and economic growth. We also call for industry consultation and a pilot program ahead of implementation with the aim of avoiding problems there have been with RDTI in recent years.

It is increasingly agreed that enhanced productivity is the key to generating the real growth Australia will need in the years ahead given the scale of our deficits. Increasing innovation will be the key to achieving this greater productivity.

Read the full submission: Principles for an innovative software development tax incentive

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