Through this rapid expansion and scale up, it’s important that Fintechs consider how their corporate tax structures support growth, how they engage with the R&D Tax Incentive (RDTI) and grant initiatives, how these functions align with internal governance processes and how they keep abreast of regulatory changes at play.
As we near business planning season and end of financial year, have you considered how R&D Incentives, tax considerations and a governance structure can support your sustainable growth?
Tax structuring and compliance
To support compliance during a Fintech’s growth phase, it’s important to establish a strong corporate structure. This ensures processes and administrations are commercially sound and tax efficient. Taking into consideration your expansion and growth strategy, this corporate structure will minimise tax leakages now and consolidate information, ensuring your data is easily accessible and can be tailored according to new business structures should you wish to IPO or merge in the future.
Secondly, with reduced capital investment in the market, Fintechs may face difficulties in funding. As such, now’s an optimal time to explore options to leverage existing growth opportunities such as the RDTI. Additionally, incentivising investors is important. That's why tax concessions available to encourage investors to support qualifying early-stage innovation company (ESIC) play a significant role in driving funds into the Fintech sector.
Global mobility and attracting top-tier talent to Australia also remains an ongoing issue. However, with global mobility increasing following recent border closures, this present issue should reduce over the next few years. As attracting a skilled workforce remains a key focus for the government, incentives should be considered and leveraged as you consider global mobility and resourcing.
R&D considerations for Fintechs
Given the Fintech sector’s focus on innovative and disruptive technologies, it’s no surprise that many Fintechs are claimants of the RDTI, the Federal Government’s flagship innovation support program encouraging Australian based R&D activities. While there was no mention of the RDTI in the recent Federal Budget, no news is good news and retaining the RDTI in its current form continues to provide confidence to business around investment in innovation.
For those companies with an aggregated turnover below $20m and in current year tax losses, there is the potential to receive a cash refund through the RDTI. With many Fintechs in the high-growth phase with elevated investment in innovation, the opportunity to increase cashflow back into the business provides a valuable source of funding.
Yet, due to the innovative foundations of Fintechs, there can often be ambiguity when it comes to determining RDTI eligibility.
A few fundamental considerations that Fintechs should be aware of include:
1. The unknown outcome requirement
Focusing on the unknown outcome requirement of the eligibility criteria for an R&D activity and ensuring that it is well considered and documented. For example, in the R&D Application Form, there are specific declarations for the claimant to complete enquiring around what steps and research was performed to understand what already exists on a global scale. This requirement was also heavily focused on in the updated software guidance released by the program regulators.
2. Documenting R&D activities undertaken
Once you register your activities with AusIndustry, this does not give a claimant a tick of approval in relation to these activities. Review questions from either regulator may come years later. If you are claiming the RDTI, there needs to be a thorough and detailed paper trail in place – one that outlines the exact costs you incurred and the specific R&D activities that led to those costs.
3. Delineating between R&D and business as usual activities
This includes when a product may have gone live but there are continuing R&D activities to develop further improvements. It’s important to note that following a software development lifecycle does not automatically make it eligible R&D.
4. Identifying and classifying eligible ‘associate expenditure’ accordingly
Amounts classified as ‘associate expenditure’ must be physically paid by the respective financial year-end, exclude any mark-ups, and be paid at arm’s length (i.e., market value).
Importance of good governance
A robust governance framework will give the ATO confidence that a taxpayer is aware of their tax obligations, is managing tax risk appropriately and any tax incentives claimed will need to form part of that. It’s important to follow the governance framework as published by the ATO for both income tax and GST for Fintechs, including having a specific tax policy that aligns with broader governance frameworks, conducting self-assessment exercises and seeking independent assurance and expertise where needed.
An issue we frequently come across with companies that have historically claimed RDTI, is not having appropriate R&D governance frameworks and documentation in place. This documentation is however an important means of demonstrating that you have an effective, robust tax risk management and governance framework in place, which you apply in practice.
Navigating complex regulation
It’s a real challenge for Fintechs to navigate a fast-moving regulatory landscape while developing their proposition, focusing on raising capital and competing with large incumbents.
Whilst measures such as the Federal Government’s Enhanced regulatory sandbox and APRA’s restricted ADI (RADI) licence for digital and neo banks are welcome, there is still a lot of red tape in the financial services regulatory landscape. Many Fintechs find the regulatory landscape difficult to navigate and struggle to understand what licencing requirements will apply to them and in what circumstances.
This is where the real value of an experienced advisor or lawyer can make a big difference. However, the costs can become prohibitive.
Many Fintechs we have spoken to believe there are significant productivity gains to be unleashed in the financial services industry if new entrants can more readily compete and not feel hampered by the complex web of regulations. This demonstrates an opportunity for ASIC and APRA to expand on the existing frameworks and make them easier to understand. Of course, there remains and will always be a balance between allowing and fostering innovation with the need to protect the consumer.
Unsure whether your processes are set up appropriately?
For expert advice on tax governance, the RDTI or navigating the regulatory landscape, please get in touch with our expert advisors.
