RedEye founder Wayne Gerard on how the R&D tax incentive should be fixed to drive growth in Australian startups

Last week, minister for innovation Greg Hunt released a series of recommendations from the federal government’s R&D tax incentive review.

Whilst it is great to see R&D receiving focus from our political leaders, I believe the recommendations have overlooked some important reforms that could drive growth among our next generation of Australian businesses.

With startups increasingly generating not just some, but most of the new jobs growth here and overseas we can’t afford to miss this opportunity to get these changes right.

Below are the key points from my letter to Minister Hunt.

1. Collaboration between business and startups

Collaboration is a key recommendation from the review panel, yet there is a significant missed opportunity around collaboration between existing large business that wish to apply for the R&D tax incentive and startups.

Encouraging large businesses to engage with the startup sector to conduct R&D, will help create new startups and new jobs that solve relevant industry problems.

Hopefully, these problems are relevant in a number of markets and the startups can scale to service these markets – creating new export revenues.

This is a unique opportunity to encourage collaboration between traditional industry and startups. From this, we should expect to see:

  • Increased industry collaboration and funding of incubators and accelerators
  • Direct investment in startups (unlocking funding sources for startups)
  • An increased rate of startup success (as a result of solving real industry problems and attracting paying clients)
  • A cross pollination of mentoring, business skills, entrepreneurial skills, new business models, etc leading to a more competitive economy overall

2. Funding cap up to $2 million should be removed

I believe the presence of a $2 million cap will simply encourage startups to establish R&D jobs and IP in other countries once they hit the R&D tax refund cap.

This is counter to the interests of the startup community and the Australian economy.

Startups have a global mindset – we will establish our business and teams in any country that makes the most sense.

We are driven to maximise the scale and potential of our businesses. There are so many countries offering incentives to attract startups that we will take advantage of the best incentives.

3.Double the R&D tax incentive for startups

I believe we should double the R&D tax incentive for startups with revenue up to $20 million as this will accelerate job creation in the innovation economy.

This move would also increase the probability of success for startups and accelerate the speed that a startup can get its products and services to market.

You could offer an increased rate for startups that collaborate with existing large companies in Australia, as their R&D will help other Austalian companies to be more competitive and more sustainable, benefiting the whole economy.

4. Pay the R&D tax incentive quarterly to startups with a turnover of less than $20 million

Using my own business as an example of this principle in action –  in FY 2016, RedEye loaned $500,000 from our external directors and an angel investor at an 18% interest rate for six months as a prepayment on our R&D tax incentive.

The loan was secured against our R&D tax incentive. We needed to do this to continue to invest in our business as we are not yet cashflow positive. This loan enabled us to continue to grow, we grew from 28 to 36 people during that period, which we would not have been able to do without the loan.

In fact without the loan we would have reduced our headcount to below 20 people.

Paying the R&D tax incentive quarterly based on BAS reporting should be trialled in FY2017 with a group of startups that wish to register for the trial. We would be happy to report on the benefits and you could measure the value prior to introducing quarterly payments if successful.

This article was first published on LinkedIn.

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