Last month’s Victorian State Budget is being celebrated as a ‘’game changing tech budget’’ on the back of a raft of new funding initiatives for start-ups and small business enterprises (SMEs). It is perhaps the breadth and depth of the funding that best evidences what the Victorian Treasurer, John Palls, has called the ‘’government’s optimism’’ in the role that startups and SMEs will play in Victoria’s post-Covid economic recovery. 

Here’s a breakdown of some of the more headline announcements.

R&D

The Vic Government has flagged a move into the R&D lending market by pledging $50 million for an R&D cash flow loans initiative.

Startups and SMEs claiming the federal government’s R&D Tax Incentive will be able to apply for low-interest loans from the State Government, covering up to 80% of their forecast refundable tax offset.

$2 Billion Breakthrough Victoria Fund

In one of the most significant investments any government has made in innovation for many years, the Vics have allocated $2 billion to a Breakthrough Victoria Fund. The funding is to be spent over 10 years and will be focused on supporting R&D in local businesses in sectors in which Victoria is already strong, namely life sciences, food and agriculture, manufacturing, clean energy and digital technologies.

LaunchVic Receives $40 Million Boost

LaunchVic is Victoria’s start-up agency. Its role is to grow the broader start-up ecosystem by investing in programs, projects and organisations that support startups and help them scale. In welcoming the additional funding, the Chair of LaunchVic, Leigh Jasper, said this multi million commitment was ‘’a vote of confidence in Victorian Startups’’ and recognition that ‘’startups are proven job multipliers’’. In this last respect, studies show that for every high skilled job a start-up creates, a further five jobs are generated in associated service sectors.  This is just one of the many spill over benefits of cultivating entrepreneurship.   

Two other funds established by LaunchVic – the Victorian Start-Up Capital Fund and the Women’s Angel Sidecar Fund – were also the beneficiaries of funding boosts.

Victorian Startup Capital Fund

The Victorian Startup Capital Fund will receive $60.5 million over three years to support early-stage startups. This will inject much needed early stage funding into the start-up and VC ecosystem and will go a long way towards ensuring promising start ups can scale and become the unicorns of the future.  

It’s expected that the government’s investment will be matched by private sector investors (e.g. high-net-worth individuals and super funds) which would mean that the fund’s size could well double within the next couple of years.

Women’s Angel Sidecar Fund

In exciting news, $10 million has been allocated to the new Women’s Angel Sidecar Fund which is dedicated to helping women-led startups gain more ready access to capital to grow and scale.. 

Again, it is expected that the private sector will match the funding, ultimately unlocking perhaps as much as $30 million in early stage funding, with up to $250,000 in co-investments on offer! 

Venture Growth Fund

Finally, the Vics have announced that they will invest $25.7 million to establish a new Venture Growth Fund. This is intended to be an anchor investment that will encourage the private sector to tip in additional funds. The aim is address the challenge startups face accessing capital but the focus here will be on low interest loans, for which so many startups have difficulty in gaining approval. It is likely to be well received by founders who will now not necessarily have to make the difficult decision to surrender equity to scale.

As you can see, a lot of trust is being placed in start-ups and SMEs to lead the Victorian economy out of the doldrums post Covid.  It’s especially pleasing to us to see the role that ‘’innovation’’ and ‘’R&D’’ can play in this journey finally being given due recognition. It’s fair to say that there has probably been no better time for  Victorian start-ups and/ or SMEs to think about making a grant application.  Suffice to say, we also think there is no adviser more expert than NOAH in terms of helping with the identification of likely grant opportunities and the subsequent preparation and management of the application.  Don’t just take our word for it- put us to the test and contact Noah Connect today. 

We provide online consultation, have a proven track record and make seamless processes our top priority. Interested to learn more about grant application processes? Read our blog 6 Musts For Grant Success In 2020. 

The number of companies reportedly making R&D Tax Incentive claims in Information and Communication Technology (ICT) is second only to those in the ‘Engineering’ field of research. One would expect that this number will only increase as uptake by SMEs and the tech Startup community continues to grow.

Recognising this, AusIndustry has issued Guidance Material for ICT that outlines, through commentary and case study, the government’s views on what will and won’t qualify for claim. ‘Algorithms’, ‘cloud computing’, ‘GUIs’ and ‘software modules’ all get a look over. Software development is also always a hot topic in AusIndustry forums and blog posts on the topic abound from every adviser imaginable, including the ‘Big 4’ through to smaller independents.

There’s lots of confusion.

Despite all this guidance, discussion and opinion there is still a lot of confusion as to exactly what software development activities will qualify for claim. To date, we’ve tended to resist putting our two cents worth out there and have preferred to offer tailored advice on a client by client basis. However, in our travels we continue to be asked for our views on software development and R&D tax, so perhaps the time is right to offer up some thoughts.

‘Guidance’ material is exactly that…guidance.

We acknowledge that the guidance material published by AusIndustry should be factored into any discussion on the eligibility of particular software development activities.  But we would qualify this by noting that it is, as the name suggests, “guidance” only that is intended to help address general questions of uncertainty and difficulty. It cannot be regarded as definitive.

 Not all software is created equal.

It seems much of the difficulty with ICT/software development is that it is an area of rapid transformation. Change is embraced and adapting to new technologies is the norm. It seems that innovative methods and techniques are introduced at such a rapid rate that what requires “R&D” one day is almost a routine activity the next. There is a danger when government (and advisers) buy into this popular perception too readily, for it can lead to setting themselves up as pseudo tech experts.

This danger is realised when they then become prescriptive about what qualifies and what doesn’t based purely on false assumptions. The number of times I’ve heard another adviser – with no background or expertise in the technology – pronounce that “the development of a phone app can’t be R&D because there are so many phone apps out there nowadays and so many tools available to help build them”.  Now, the development of that phone app at the end of the day might well not benchmark strongly for claim but the rationale can never be based on the fact that “there are so many of them out there now”. The same approach in respect of the cloud or mobility is equally ill conceived.

Then again, not all software is innovative.

On the other hand, another view might be that all software development is potentially eligible because the agile iterative software development methodology that is now an industry standard is inherently “experimental”. This approach is also flawed because it doesn’t pay sufficient regard to whether there were any precedents for the development and the extent to which any new knowledge was generated.

So, where does all this leave us?

Clearly, there is great potential to claim software development activities under R&D tax and the stats prove that a lot of such activity is indeed claimed. Guidance material from government can help provide a framework when qualifying such activities. Nevertheless, each development should be benchmarked against the legislative definition and treated on its merits, free from any assumptions that certain software development activities in particular areas cannot be “R&D” because they are now “old hat”.

Claimants (and their advisers) should always work from first principles and assess what activities have been conducted and the extent to which they can legitimately be described as “experimental” (remembering evidence of the journey from “hypothesis” to “test” to “analysis of results” to the drawing of a logical conclusion). And not forgetting the need to articulate a compelling argument that some “new knowledge” has been obtained from the exercise.

In this last respect, determining what is “new knowledge” and what is a relatively transparent extension of the “prior art” can be another contentious area. But that’s a topic perhaps best left for another post.