Tech Council says Budget R&D and CGT tax changes are a pincer movement squeezing startups

In three feedback submissions to Treasury – consultation closed yesterday – the council supports elements of the government’s tax package, revealed in the May budget, but seeks changes to the Research and Development Tax Incentive (RDTI), Innovative Business CGT Concession (IBCC) and venture capital tax schemes.

The TCA’s R&D submission warns that removing supporting activities from eligible expenditure would likely outweigh the benefit of higher offsets for core research.

“In many cases removal of supporting activities will see most of a software company’s claim being ineligible,” it says.

It’s a widely held view, with the deep tech sector sounding the alarm over the unintended consequences on innovation from the changes to tighten qualifying activities.

One anonymised frontier AI company classified just 30% of its eligible R&D expenditure as core activities. The remaining 70% covered supporting work, including software engineering, data preparation and testing frameworks.

Another deep tech business needed a dedicated fabrication facility before conducting experiments, but specifying, building and calibrating its equipment was classified as supporting activity.

The council says some companies could be excluded from the scheme entirely if they cannot fund the supporting work needed to undertake core research. It wants supporting activities retained or, alternatively, the core definition expanded to include novel activities indispensable to the research.

Treasury proposes introducing the RDTI changes from July 2028, including higher core offsets, a $200 million expenditure ceiling and a $50 million turnover threshold for refundable offsets. The council welcomes those increases.

However, it opposes restricting refundable offsets to companies operating for less than 10 years, with an extension to 15 years for eligible therapeutic-goods R&D.

It argues quantum, robotics and space companies also face long development periods and may still have no revenue after a decade. Non-refundable offsets would not address the loss of cash funding.

Coincidentally, TCA CEO Kate Cornick contributed to the Denholm report, Ambitious Australia, a strategic examination of Australia’s R&D landscape, and hoped it would prioritise startups.

But TechBoard analysis cited in the TCA submission found 699 of around 3200 tech RDTI claimants were older than 10 years.

“While it is not possible to distinguish the proportion of these that claim the refundable offset, of these only 28% are medtech companies, while 19% are climate tech companies, and 11% are fintech companies,” Techboard found, with the submission adding that “demonstrates that the age limit is likely to have an impact far broader than on biotechnologies alone”.

The council urges removal of the age cap or, failing that, extending it to least 15 years across eligible companies. It also wants the existing $20,000 minimum expenditure threshold retained for first-time applicants, rather than immediately lifting it to $50,000.

The submission cites Kascade analysis showing claimants below $50,000 represented around 7% of RDTI participants but just 0.17% of claimed expenditure in FY24.

The proposed R&D restrictions could also affect access to the IBCC, which would provide a 50% capital gains discount for qualifying early-stage investments.

The council warns that removing supporting R&D could make it harder for software and AI businesses to satisfy the proposed innovation test, particularly where they cannot meet the alternative intellectual property requirements.

It wants simpler tests recognising existing innovation assessments, including an early-stage innovation company finding, investment from a registered early-stage venture fund or a recent refundable RDTI claim.

While welcoming removal of the proposed lifetime cap in the IBCC proposal, as well as increasing the company age limit to 15 years and a shorter three-year holding period for shares, the council wants the $50 million turnover ceiling doubled to $100 million and indexed.

“This means our highest potential scaleups will be excluded from the IBCC, along with the founders, employees and investors who back them,” the TCA submission says of the retained ceiling.

It also seeks removal of Australian workforce and asset-percentage tests, arguing companies can expand local employment while their Australian share falls as overseas operations grow.

The submission adds to the concerns of many others in warning that investors and employees could lose concessions retrospectively because a company changes its business or misses reporting obligations.

“Asset holders, especially angel investors and employees, cannot control or monitor for these conditions,” it says.

It seeks protection for holders without knowledge or control of company failures, and warns ambiguous drafting could strip employees of concessions when they exercise options after their employer exceeds eligibility limits.

The TCA also wants concessions preserved through share-based acquisitions and corporate restructures.

On venture capital, the council supports higher investment thresholds and increasing the maximum Early Stage Venture Capital Limited Partnership (ESVCLP) fund size from $200 million to $270 million. But it wants Parliament to address existing restrictions alongside those changes.

Fintech is a particular concern. The submission says the exemption allowing investments in businesses predominantly conducting finance or insurance activities is constrained by thresholds of $1 million in expenses and $200,000 in assessable income in the previous year.

“This creates a perverse incentive to either not invest in fintechs in Australia or to exit investments prematurely,” it says.

The council wants those thresholds substantially increased, arguing they can exclude companies before their first investment and prevent follow-on funding from attracting concessions.

It also wants the schemes’ 20% overseas investment limit calculated using committed capital rather than valuations, so a successful overseas investment does not restrict further investment simply because its value rises.

Finally, the council argues for the removal of ongoing predominant-activity testing and a change to the Australian workforce and asset tests for first investments.

Testing those proportions only when the investment is made, rather than requiring compliance for the following 12 months, would allow companies to expand overseas without jeopardising the fund’s concession, it argues.

Here are the Tech Council’s full RDTI, IBCC and ESVCLP submissions.