Mahesh Sharma August 01, 2012
Jonathan Barouch, CEO & Founder of Roamz. Photo: Tamara Voninski
The government has prevented some technology start-ups from accessing a praised R&D tax credit, which refunds 45 cents for every dollar spent on experimental and risky technology innovation.
Although some start-ups have rejoiced in the increase from 37.5 cents to 45 cents effective this financial year, others filing their FY11 tax returns are learning that, for the first time, they cannot access the credit if they have sold more than 40 per cent of their company to an investor that reports over $20 million annual revenue.
The AusIndustry-administered credit scheme provides credits for expenditure such as rent, software development and testing, and web hosting.
The "grouping for aggregated turnover purposes" provision was introduced on July 2011 as part of a overhaul to the R&D Tax Incentive, which offers the high-value tax credit to companies that generate less than $20 million revenue. The changes mean when companies report their income they must also include the revenue of any major investors with more than 40 per cent equity. For example, if a start-up has $15 million revenue and sells a 40 per cent equity stake to an investor who has $100 million revenue, the aggregated revenue for the tax credit calculation is $115 million.
Technology start-ups have suffered, according to TCF Services research and development tax consultant Andrew Flick, because the Tax Office also counts the revenue from all companies in an investing venture capital firm's portfolio.
"The start-up is struggling day-to-day and might not have any income for themselves but, because they got a cash injection from a VC to do R&D, they may not be able to get the benefit of the scheme."
"The VC tips their turnover into a category where they only get the non-refundable benefit. They can't actually get the cash from the government.
"The start-up doesn't usually have any tax to pay, they're more interested in cash in the business."
Sydney start-up Roamz earns less than $20 million revenue and satisfies the government's definition of innovation, according to founder Jonathan Barouch, but it was disqualified from the tax credit because the Tax Office also counts the revenue of major investor ASX-listed Salmat, which last year bought 60 per cent of the business.
"Our whole business meets the criteria and the definition of R&D. It's novel, experimental, there's a degree of risk in the technology; we're iterating over things that fail and are successful," Barouch said. "If it's 40 per cent [equity] you probably haven't got enough money to spend on R&D anyway. You're kind of damned if you do and damned if you don't."
"If you have unintended consequences where legitimate start-ups aren't able to access it, and it's not a level playing field, that's seems like something that doesn't sit right."
"This is one of the things [the government] does to support the ecosystem and I think that's fantastic but it needs a bit of love and attention."
Flick said the government's changes took aim at big mining companies from illegitimately claiming the full tax refund using R&D activities in unprofitable mining subsidiaries. However, the spirit of the law hasn't translated to the technology industry, where start-ups regularly sell at least 40 per cent to large investors.
He proposed that the Tax Office excludes financing companies and venture capital firms.
"It used to be the mining companies would take a lot of the money. There was an infamous case where a mining company would do an R&D activity at the bottom of a mine; then they would look to claim the actual building of the mine; then they would look to claim the building of railway line out to the mine; then they would look to claim the airport to bring the workers in and out. They were the main targets this time around in actually changing the scheme.
"Overall we're quite happy with the scheme and a lot of what they've changed is to knock out the bigger companies.
"It's just one of these things that tech companies get caught up in because the 40 per cent ownership can often be the amount a VC wants when they're funding a company.
AusIndustry did not respond to questions for comment at the time of publication.