The Australian Government’s commendable progress towards laying the foundations for a genuine digital economy in recent years is a welcome addition to the policy landscape. The ICT industry has long touted its potential to drive productivity growth and spur the creation of new jobs and even entirely new industries across the economy.
The National Broadband Network (NBN) is an essential foundation. It will provide the basis for an application-rich environment with the capacity to support major reform through the adoption of intelligent technologies in sectors ranging from healthcare and education to utilities and logistics.
The Government has demonstrated a clear understanding of the major issues, and should be congratulated for its commitment to the current levels of investment in the face of criticism that ranges from dismissing the need for faster email to highlighting a lack of consumer demand for high-capacity broadband services.
Clearly, the digital economy amounts to far more than that. It is becoming more important for the ICT industry to deliver this message to customers, clients and the general public at every opportunity.
We cannot afford to take Government for granted. The policy settings required to deliver genuine digital benefits are complex and must be considered and integrated across the board. They extend to almost all departments and portfolios, from Broadband and Communications, to Industry, Treasury, Environment and beyond.
Innovation policy is central to this platform: The entire success of the NBN and Australia’s digital economy depends on value-added services and innovative software development.
In this context, the recently proposed amendments to the R&D Tax Concession scheme have caused some concern. The primary issues revolve around the added administrative burden that compliance with the revised eligibility criteria will entail and decisions that will limit the scope of software R&D allowable under the scheme.
The proposed legislation will require core R&D activities to comply with a test that demands both novelty and high levels of risk. Under the current laws, only one of these criteria must be met. This change would put Australia out of step with each of our major trading partners - potentially jeopardising local investment and seeing some of that money head offshore. It would also stand in contrast to accepted OECD definitions.
Supporting R&D activities will also have eligibility tightened through a requirement that the ‘dominant purpose’ is to support core R&D activities. Claimants will also need to demonstrate that their R&D activities comply with four interlocking threshold tests.
The exclusion of software services outside of standard development is also a blow. Integration of off-the-shelf and open source software will be ineligible under the new rules, and a ‘multiple sales’ test will mean that software development needs to make a commercial return directly from supply of that software to two or more unrelated entities.
The outcome of these changes to software scope will mean, for example, that a major R&D centre would not be eligible to receive tax concessions were it to make use of open source or off-the-shelf software for the creation of new products and services.
The changes may also be inappropriate for emerging business models where software can be offered at no charge — or simply to unidentified users, as is often the case in cloud computing and Software-as-a-Service.
Under the current proposals, some commentators are estimating that the ICT industry could lose up to 80 per cent of R&D tax concessions should these amendments pass into law.
Research and Development is essential to an innovative ICT industry and the proposed amendments could threaten our contribution to wider business and the digital economy. The burden of the revised eligibility criteria will weigh particularly heavily on small businesses — a traditional innovation powerhouse in the ICT industry. And the restrictions being imposed on software development seems to be at odds with the stated goals of government in the digital economy. The result will be to compromise the development of successful NBN applications and the return on the considerable investment being made in NBN infrastructure.
The good news is that much of this impact is not, in fact, the intended effect of the legislation. These changes — which may ultimately cut the Government’s billion dollar R&D program in half — are being introduced ostensibly to tackle rorting of the program from other areas of industry.
That means there is some chance that appropriate changes to the proposed legislation will be made prior to its implementation.
Ian Birks is Chief Executive Officer of the Australian Information Industry Association.