R&D changes to ‘completely eliminate’ cash flow support for some startups: RSM

"In combination, these measures will reduce and, in some cases, completely eliminate cash flow support for genuine Australian R&D for some start-ups and small businesses, create new classification and expenditure attribution disputes, and disproportionately affect all priority sectors," the accounting firm stated.

"In some cases, the proposals will decimate sectors with long, regulated and interdependent development pathways."

RSM Australia warned that inclusion of these two measures would lead to outcomes contrary to the objectives of the Ambitious Australia Report, which examined Australia's R&D system.

The accounting firm noted that the start date which governs item 1A is fixed to the earliest day on which the R&D entity or any entity connected with it, which is its affiliate or of which it is an affiliate, first started carrying on an enterprise.

"This imports the commercial history of investors, founders and other unrelated entities into the eligibility of the R&D entity. Instances include a founder's earlier and unrelated sole-trader activity or family trust, a venture capital or ESVCLP fund holding 40 per cent or more of the equity, a university co-owner, or a foreign parent which commenced business offshore decades ago, each fixing the start day," it said.

"A newly incorporated Australian company may therefore fall outside item 1A on the day it is formed, notwithstanding that it has never conducted R&D, and the arrival of institutional capital may itself extinguish refundability at precisely the point in a company's life at which the Government's other announced measures are designed to encourage that capital to arrive."

RSM Australia also said that it considers "carrying on an enterprise" to be an impractical basis for a start-day test.

"The concept extends to preparatory and commencement activity, so the start day may precede the existence of any business and indeed the incorporation of the R&D entity itself; it is a question of fact rather than a registrable event, and therefore inherently more contestable for taxpayers and the Commissioner alike; and it carries no Australian nexus, such that offshore activity by an offshore connected entity can fix the start day," the firm said.

"We would further observe that having previously carried on an enterprise is, if anything, a positive indicator of successful commercialisation rather than a marker properly associated with reduced eligibility."

The firm also warned the government that because connection is tested only as at the relevant time, "refundability may be lost and regained without any change in the entity's own activities".

RSM said this was an inappropriate basis on which to determine access to a cash flow measure.

"Neither the start date of the R&D entity, whether for 'carrying on a business' or 'enterprise', nor an 'earlier of' test should impact when the R&D activities should receive the incentive," it said.

RSM Australia recommended that the government implement an Export Market Development Grant style limit on the number of refundable R&D tax claims, rather than number of years.

Alternatively, it suggested that the government could provide for a preliminary number of years for access to the refundable R&D tax offset, followed by the ability to apply for ongoing eligibility depending on KPIs such as average annual revenue growth rate or other measurable metrics.

The firm also said that the removal of supporting R&D activities from eligibility was "unnecessarily blunt".

"We recommend that Treasury adopts a proportionate model that excludes remote, routine and commercially oriented activity while preserving a pathway for expenditure and activities with a direct and demonstrable experimental nexus," it said.